Thursday, January 24, 2013

The Ivy League Analysts

I wonder what it's like to be a journalist or a pundit. You write about stuff, make proclamations, and form strong opinions on things that you barely know about. And once you get to nationally read publications, it seems like every other editor or writer has an undergrad degree in journalism from a various Ivy League or top-20 school.

The end result is a bunch of nonsense spewed out as if it were fact. This article is one particular example I want to showcase:

It's a very provocative and confident proclamation. But here's the rub, it describes a future occurrence that may or may not happen. And it very well could happen, but at this point, it's a way safer bet to assume that this isn't going to happen. But why does Mr. Manjoo think otherwise?

If you read the article, he cites a few things. Amazon has plans to spend 1.6 billion dollars on new distribution centers, bought a company that specializes in shipping robots for 775 million dollars, and notices that he very often gets next day delivery on his 2-day delivery purchases. That's it. And that's after he acknowledges that Amazon is going to lose a big pricing advantage (when they roll out distribution centers, they have to collect sales tax in that state).

The end result is that we're all supposed to buy the things we want online at Amazon and have it arrive at our doorstep sometime right before we come back from work. Now maybe he knows he's stirring the pot and that he doesn't really believe what he says. But based on the writing, it's hard to believe that. 

It's very hard to believe that any company could "destroy local retail" with a 2.4 billion dollar investment. Not only that, but it's very hard to believe that Amazon can succeed at beating local retail at its own game, especially giants like Wal-Mart, who spends much more than Amazon does when it comes to improving their own logistical operations.

But all of that pales in comparison to the financial situation that Amazon finds itself in:

See that? Look at the part where it says P/E (price to earnings ratio). The number next to that is 3583.4. What does that mean exactly? It means that if Amazon remained as profitable as it currently is and returned all of its profits back to its shareholders, it would take 3583.4 years to recoup the initial investment if an investor bought its stock today.

The only reason why investors buy companies with high P/E ratios is if they think the company's profitability will grow incredibly fast. But a P/E of 3583.4 is astronomical, and the company has had a P/E over 500 for a couple of years now. Amazon's best year was last year and it made 700 million in profit. By comparison, Microsoft made 16 billion in profit that same year, 23 times as much, and only has a P/E of ~15.

Investors seem to think Amazon will turn into a huge retail monopoly that will be able to charge monopolistic prices to the consumers held captive by its business model. It absolutely baffles me how ridiculous Amazon's stock price is. Everybody is looking at revenue growth and assumes profits will eventually grow at the same rate. I'm highly skeptical that this can happen. But at the same time, billions of dollars a day are traded on that assumption. I have no idea why Wall Street collectively decided that Amazon was going to be the company to pull a feat like this off.

On the back of all this, Mr. Manjoo thinks that higher prices due to sales tax is more than a fair price for a consumer to pay? Would Amazon be such a great deal if all of its goods cost 20% more (roughly the amount that Amazon would cost consumers if investors treated it like a mature company plus the collection of state sales tax)?

Now, things could turn out much differently and maybe both Mr. Manjoo and Wall Street will be right and I'll be wrong. But I'm willing to admit as much. There is almost no doubt in Manjoo's writing, and it's that kind of attitude that you find in the opinion pages of almost every national publication. It bothers me a lot. And I haven't even begun to talk about the breathless arrogance implied by Slate's You're Doing It Wrong segment. But that's for another day.

I have a segment of my own called Predicting the Outcome. I make a simple prediction and then I keep a running tally of how many I got right and wrong. So far I'm 1-1 with the jury still out on 2 others. I just wish the Ivy League analysts at all these journals and newspapers did the same thing.

1 comment:

  1. Interesting read Jay. Amazon's stock price and astronomical p/e ratio reminds me of Krispy Kreame Doughnuts (KKD) price and p/e in the early 2000's. Have a look at how far it fell.....