A longer version of this commentary originally appeared on Real Money Pro at 9:26 a.m. ET on Thursday, Jan. 14. Click here to learn about this dynamic market information service for active traders.
I believe that the market's beloved FANGs -- Facebook (FB), Amazon (AMZN), Netflix (NFLX) and Google/Alphabet (GOOG, GOOGL) -- are in the late stages of a bubble that's recently begun to burst.
I've had small short positions in TSLA, FB and NFLX for a while, and I just added a short of AMZN to my portfolio yesterday at around $600 a share. Here's why:
Amazon's Delivery Woes
Few companies are perceived as having as wide a playing field as Amazon does, but consider the fate of Levitz Furniture, which was the market's darling in 1972.
Levitz's flaw was delivery -- it paid truckers so little that furniture rarely arrived undamaged. Customers returned much of it and margins disappeared.
This might be happening to Amazon right now. Visits to UPS (UPS), FedEx (FDX) and the local post office suggest that a huge number of e-commerce returns are clogging their systems. The typical comment among workers there has been: "We've never seen anything like this!" Although no one has cared about this in the past, it can't be good for margins now.
Amazon Web Services
AMZN's stock price exploded upwards last year when investors got a look at the key Amazon Web Services division's profitability.
However, that exposed AMZN to scrutiny from analysts in the tech area who follow AWS competitors like Microsoft (MSFT) and Oracle (ORCL) -- and AWS might be threatened by other competition as well.
How all of this plays out is anyone's guess. But I suspect margin contraction at Amazon Web Services will cause investor concern for a stock that's currently at a 40x+ trailing-twelve-month multiple when almost all of the "EBITD" is caused by the "D" (depreciation).
Will the Cloud Dissipate?
Cloud-computing services might be the contemporary version of fiber optics, which were an important driver of the late 1990s tech bubble until prices dropped abruptly.
Qwest and Global Crossing both filed for bankruptcy as overcapacity and advances in other technology destroyed the industry's business model. The same dynamic could invade cloud computing.
David Stockman's Take
David Stockman (with some help from Dave Kranzler at Investment Research Dynamics) recently wrote a good piece recently in which he noted that AMZN's valuation is in an extreme state by almost any measure.
For instance, the company's price-to-earnings multiple is 830x on a trailing-twelve-month basis, as well as 97x free cash flow.
Amazon has also only earned $2 billion -- total -- over roughly a quarter-century of existence, although its market capitalization rose by $180 billion in 2015 alone. That's 90x the company's cumulative profits over Amazon's entire history! (The stock has lost $50 billion in market cap so far in 2016.)
Stockman also noted that Amazon's accounting is aggressive, while Silicon Valley start-ups have purchased nearly half of the AWS cloud-services product (using money provided by venture-capital firms).
Feasting on sales to these "unicorns" reminds me of the large but short-lived success that AOL enjoyed in the late 1990s when dot-coms paid the company big bucks to expand "eyeballs." That revenue quickly went away when the dot-coms collapsed.
Meanwhile, cloud-computing services have become commoditized and prices have dropped dramatically. Stockman cites the example of one company where contracted cloud-computing prices have fallen more than 90% in the last three years.
Taking out the AWS contribution indicates that Amazon's core e-commerce operating margin is only 32 basis points -- a rounding error.
Lastly, Stockman noted that the hot Amazon Prime service has contributed to an advance in cash and sales, but that the lure of free shipping and other benefits could drain cash in the future.