Bruce Greenwald: Amazon Is Trading on Vapors

In the interview below, Bruce Greenwald, distinguished investor, professor, and advisor, sits down with Brendan Byrnes to discuss a variety of topics as they relate to investors today. Professor Greenwald is a famed value investor, always trying to buy mispriced assets at a discount to their intrinsic value. Our own superinvestor David Gardner takes a different approach and seeks out paradigm-shifting companies before Wall Street is keen to their potential. Both have trounced the market for years, and I invite you to learn more about how David discovers his winners today; just click here now to read more.

Bruce Greenwald: Now, Amazon I think is completely different. I think, if Apple is a current profit machine, Amazon is trading on vapors. [laughs]

They make no reported profit; the whole story is a growth story. They're buying customers on the theory, presumably, that those customers are going to be profitable in the future. Now, for customers to be profitable you have to dominate segments.

The segment that Amazon has traditionally dominated is, of course, books, music, and video. Well, we know what happened to the music business when it went digital, which is the profit vanished and even Apple doesn't make any money on iTunes.

The same thing is happening to books, with the connivance, by the way, of Amazon. The same thing is happening to video, so their core business is dying. The business that they dominated, where they made all their money, is dying.

What have they decided to do? Go into a lot of businesses where they have no competitive advantage. First they've gone into every variety of retail: TV sets against Wal-Mart and Best Buy, who have better distribution economics...

They can buy the business, but in the long run, unless they can get bigger share than those companies, their pricing is going to be at a disadvantage to those companies, because those companies can distribute the TVs and other devices more cheaply.

Then what did they decide? They said, "Oh, that wasn't a big enough challenge. Let's go after the Oracles and the IBMs and all the companies that do cloud computing, and the SAPs and so on, and the Googles," and they went into that business.

Now, if you think they've got a competitive advantage in that business while they're going after everybody in retail, lots of luck. But then they decided that was not enough, so they decided to go after Apple and the others in the device business.

This looks, to me, like a company that makes no reported profit, which I think is fair, that's trying to buy growth in all sorts of areas where, because it has no competitive advantage, the growth is going to be value-destroying, not value-creating.


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  • Report this Comment On January 04, 2013, at 7:51 PM, RFID wrote:

    He is right, AMZN's forward P/E is 260

  • Report this Comment On January 05, 2013, at 1:31 AM, ConstableOdo wrote:

    He can easily drive down Apple's shares by badmouthing it and scare off investors but he'll never be able to do it with Amazon. With Jeff Bezos at the helm, he'll be able to convince anyone that Amazon is going to take over the world in a few years. Those 'vapors' will propel the stock to $300 a share. As near as I can tell, Amazon never makes any mistakes. It's Wall Street's favorite darling. It must be great to own a stock like that.

  • Report this Comment On January 06, 2013, at 7:04 PM, EquityBull wrote:

    Could not agree more. Matter of fact I read an analysis on Seeking Alpha where the writer looked at the warehouse/infrastructure expansion as sales expand. It showed that if they grow revenues they must grow overhead at roughly the same pace thereby guaranteeing as they scale they never can profit.

    IF they cut spending on warehouse space they can no longer grow so they are forced to do so infinteily. Until growth slows to zero there will be little to no profit if not losses. Once it is at zero the valuation does not even come close to working.

    Amazon is in a razor thin commodity margin business. Every single line. Retail. Cloud computing, Devices sold at or under cost. It just does not work. The stock will have its day where reality sets in. Once the random move down starts the momentum guys bail first hard. Then technical traders as charts break. Then panic selling.

    My target is PE of 10. Assume someday they can eek out $1 to $2 in EPS gets you to $10 to $20 per share.

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