The Case for Amazon

 | Dec 02, 2013 | 12:50 PM EST  | Comments
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Leave it to Twitter (TWTR) to yield the ultimate question that's defining this moment: "@JimCramer, would you buy Amazon (AMZN) here? Is it worth $400?" My seven-character response? "Yes and No." That's right: I would buy Amazon -- and no, it is not worth $400.

Welcome to the world of bull-market discipline -- the discipline to buy stocks that aren't cheap but are right. It's the rigor to recognize what the market wants, and not what you want. It's the dichotomy that says you would rather have your portfolio be hated by the intelligentsia and make money than be bound by concerns that simply aren't working right now.

Let's start with Amazon. This weekend, on the most watched news program on this country, I caught a terrific advertisement for the company. It was incredible: a film about an Amazon octocopter that delivered five-pound packages right to your door. Yep, this is a delivery system for the future that's right out of The Jetsons. There was only one issue, though. It wasn't an advertisement. It was a new story about how dedicated Amazon is to getting you the products you want.

Wouldn't you know it? I felt prompted to go to Amazon by that piece when I picked up a couple of Fitbits for my kids for the holidays. I had interviewed the CEO of Fitbit during our trip to the Dreamforce conference two weeks ago, and then decided to go shop small business this weekend in the town of Summit, N.J. Not one sporting-goods store carried them, and the bike shop had never heard of them. Of course, I got the lowest price possible on Amazon, and I am content not to have a drone deliver it. I will take UPS (UPS).

I mention all of this because it's the answer to the first part of the Twitter question. You can buy Amazon, the stock, because you recognize that this company will stop at nothing to bring you the best goods at the cheapest prices in a way that you don't have to do a thing about. The pain of going local and failing is made up by the pleasure of going online and succeeding. While I was at it, I debated giving my kids an Amazon Prime subscription, as well as the new Kindle, and even the Amazon credit card for the rewards. I never even care about rewards, but here they come to you and you can use them so easily -- so, well, why not?

But now, how about the second question? Is Amazon stock worth $400? By any traditional metric, the answer to this question is: absolutely not. First, the company seems indifferent to making or losing money. It's expanding so quickly right now that it almost seems to be saying to Wall Street, "Go play your silly earnings-per-share games. Go noodle over price-to-earnings ratios. Humor yourself trying to pin a price down. What's the price of being the only worldwide e-commerce play that can make a fortune when it wants to do so?"

Second, you can sniff at momentum, but this morning Goldman Sachs took its Amazon price target from $400 to $450, citing accelerating e-commerce growth and worldwide opportunities. I know -- anyone who is a traditionalist says that Goldman is just playing the momentum game, and that it's doing so with a stock that overrode the price target. As a result, such a person would say, the firm has to produce some lame-o reason to raise the price target, an alibi for the action.

Oh, and is it tough to let this one go. After this 50%-plus year for the stock, who in heck would want to sell it? Why would you? If you are an individual, you probably have a humongous tax bill and not much to offset it with. If you are an institution, you want to show you own it. That makes the stock pretty fairly blessed.

Third, unlike most of the brick-and-mortar outfits out there, Amazon has some real mystery to it. The possibility of a light's-out quarter certainly could be in the cards. It might have the best story out there in a retail world where there aren't a lot of winners.

Finally, there's the simple answer any trader at any hedge fund would give you about the worth of Amazon: "It's worth what people will pay for it." People will pay $400, or $178 billion for the stock -- and that's where the discipline comes in. As I have been saying for some time now, you have had to recognize that the notion of the "bubble" has kept you out of stocks to an extent that is simply unforgiveable if you are a performance manager.

I cannot blame anyone for wanting to sell this stock or so many others based on valuation. This weekend, also on Twitter, someone ridiculed me for going against the seminal treatise on stocks -- Security Analysis by Benjamin Graham and David Dodd -- and against Warren Buffett, who the Tweeter said is a disciple of that analysis.

I told him to go read it. If you read this book, believe me, you wouldn't buy any stock out there. The whole idea of Graham and Dodd is to buy a stock that's at an intrinsic discount to the business -- a stock that's cheap in the absolute sense, and not in any relative manner.

Take a look at Buffett's portfolio. Does IBM (IBM) fit that pattern? Does Exxon-Mobil (XOM)? Both are the two biggest recent buys, and I can tell you that they are both very expensive vs. their cohort. IBM is not growing at all, which makes its pricing incredibly rich when compared with the way information-technology stocks are currently valued. Exxon's the most expensive big-cap oil company by far.

Now, that doesn't mean I disagree with Buffett. I have no interest in owning IBM because it has no growth. But Exxon just had a terrific quarter, and right now it has the best momentum in the group -- a total irony when you think about it.

Now, Amazon is the extreme of this market, rivaled only by the Elon Musk duo of Solar City (SCTY) and Tesla (TSLA). But we see the stretched valuations everywhere. A whole host of analysts rolled out coverage of Twitter today, and a bunch of them wanted to buy it on what could be a reasonable valuation in the ultra outyears if everything goes right. Speaking of irony, Merrill Lynch launched coverage of Twitter with a Sell rating, yet had among the highest earnings estimates. In other words, Merrill chose to use traditional security analysis and found the stock wanting. The others didn't, so we have real cases being made for a stock that I think is incredibly expensive by any stretch of the imagination, save for Amazon.

Again, the logic is compelling: If you are a growth manager, and many are, then Amazon fits your growth portfolio. That judgment, by the way, encompasses the rigor and discipline I am describing. Some would call it the "Greater Fool Theory." I am saying that I can recognize what a very important cohort of money managers wants to do, which is to buy the fastest-growing stocks. I can recognize that, in a low-growth world, this high-growth ethos will attract in the most money. The high-growth managers are not bound by traditional methods of valuation, and they are the marginal buyers of stocks here. They control the prices, and they have decided in their wisdom that many years from now Amazon will look very cheap at these levels.

Are they wrong? That's not the central question. It's not what matters. What matters is that you recognize their bull case, and that they are determining prices and that you can mimic them successfully if you are willing to be chameleon-like in the name of performance.

In other words, if you think the Graham and Dodd method is the only form of discipline, then I ask you: What is that worth? Isn't a discipline that makes you money worth more than a discipline that doesn't? My discipline -- which has me acknowledge that the reasons for owning Amazon hold water -- makes me much more money than the one that says you can't buy Amazon because it flunks price-to-earnings multiple analysis.

Oh, here's one last thought. If this business -- and I am not calling it a game -- if this business isn't about making money, than I am dead wrong. I am willing to be dead wrong if I am so rich that I don't need to make money. But if I need to make money, I simply can't afford to be that wrong. That's the real case for owning Amazon.

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