Amazon Bubble Inflated to Almost $1 Trillion
SEATTLE, WA – August 31, 2018
The share price of Amazon, the online retail giant and one of Wall Street's most popular and best-performing stocks, topped $2,025.5, at its peak price, for the first time Thursday, putting it within striking distance of joining Apple as the only U.S. companies with a market value of $1 trillion.
Amazon shares closed at $2,002.22 on Thursday, extending its year-to-date gain to 71 percent.
The Jeff Bezos-led juggernaut is not only the king of the retail e-commerce space, with roughly 50% of the total market, according to eMarketer, it is also a lead player in the public cloud computing business via its Amazon Web Services unit. Additionally, Amazon makes lots of money – and its earnings are expected to keep growing at a fast clip. In the quarter that ended in June, Amazon reported sales of $52.9 billion and a profit of $2.5 billion. The company told Wall Street it expected third-quarter net sales of $54 billion to $57.5 billion, which equates to year-over-year growth of 23 to 31 percent.
According to Morgan Stanley analyst Brian Nowak, Amazon's "improving business mix" as a key reason why he sees Amazon "growing rapidly" and why he upped his price target for the stock to $2,500 a share this week. If that target – which is about 25 percent higher than current levels – is reached, Amazon's market value would top $1.2 trillion.
Peter Cohan, a lecturer of strategy at Babson College in Wellesley, Massachusetts, says the stock can hit $4,000 by next summer.
"Bezos is the world's best CEO," Cohan says, adding that the company's shares can keep rising "as long as it keeps growing faster than investors expect."
Amazon's stock has been one of the top performers in the bull market that began in March 2009, gaining more than 3,000 percent, data from S&P Dow Jones Indices show.
Amazon is one of the so-called FAANG stocks – Facebook, Apple, Netflix and Google-parent Alphabet are the others – a group of innovative tech giants that dominate their businesses and rake in billions in profits each quarter.
But the Wall Street analysts who track Apple, Amazon and other technology superpowers aren’t necessarily predicting any of them will hit $1 trillion soon. Using their average 12-month stock price targets for the largest U.S. technology companies, analysts peg Apple’s target market value at about $974 billion, with Amazon and Microsoft behind it.
A lot can go wrong for Amazon this year before it hits the $1 trillion mark. Investors are willing to pay a higher price for each dollar of Amazon’s expected future profits than they are for any other technology giant. Amazon is trading at more than 46 times its cash from operations over the last 12 months, according to Bloomberg data. Apple is valued at about 11 times on the same basis. If Amazon stumbles or if there’s a return of doubts about Amazon’s business strategy, its high valuation could become an anchor that drags down its market value.
In the meantime, the giant bubble continues to inflate. You doubt that it is a bubble? Here is the definition of a bubble: “trade in an asset at a price or price range that strongly exceeds the asset’s intrinsic value.”
There are two metrics it’s better to use: speculation and application. We speculate on what application the asset will have, always contrasted by its actual application. The biggest bubbles always occur when the potential for disruption is enormous. This creates the largest discrepancy between the speculation and the application. Think about it. It’s undeniable that we are in a bubble.
Second, the key attributes of every bubble:
- Large scale and widespread disruption
- Very little present application
- An asset with no underlying value — difficult to value
Certainly, all the technologies used by Amazon have potential, but the level of speculation is so high that it inevitably will not meet expectations. And when it becomes clear that the application will never reach the speculation, the markets will correct… and hard. The Bubble will pop.
And the bigger the bubble is, the louder it bursts. We remember this well from the dotcom crisis. But if then it was only small bubbles, now they have reached gigantic proportions. The explosion of such bubbles could wipe out the entire economy.