"Well she got her daddy's car
And she cruised through the hamburger stand now.
Seems she forgot all about the library
Like she told her old man now.
And with the radio blasting
Goes cruising just as fast as she can now.
And she'll have fun, fun, fun
'Til her daddy takes the T-bird away"
-- The Beach Boys, Fun, Fun, Fun
Amazon.com Inc. (AMZN) is trading at about $950 as I write this -- down some $130 from its $1,083.31 intraday record high -- while Alphabet Inc. (GOOG) , (GOOGL) is off some $75 from an all-time intraday high set in June. To me, both names (and the market in general) might be experiencing what I call a "Beach Boys Moment."
Now, one of The Beach Boys' most memorable songs is Fun, Fun, Fun, where the key lyric is: "And she'll have fun, fun, fun 'til her daddy takes the T-bird away." That might be exactly what's happened over the past two weeks for Amazon, and more recently for Netflix Inc. (NFLX) as well.
In this case, "daddy" is Mr. Market, while and the T-bird is the free checking account that shareholders seem to have given both firms to use for acquisitions without ever demanding a profit. But in my opinion, this market behavior might be coming to an end -- with profound consequences for AMZN, NFLX and possibly the broader market as well.
Some people will recall that I was bearish about the dot-com boom back in late 1999 and early 2000, making cautionary speeches at chartered-financial-analyst meetings and writing cautionary comments not only on TheStreet, but also in editorials and numerous interviews in The Financial Times, Barron's and elsewhere. But I was in the minority -- indeed, at times I felt like the standard-bearer for bearishness (and investment sanity).
- Amazon Will Leave Carnage as It Steamrolls Through Grocery Industry
- Amazon to Turn Whole Foods Stores Into Something Surprising, Jim Cramer Reveals
Many investment managers commonly employed a tactic back then called "tracking error" to control risk. A tracking error is a statistical deviation from an index. With tech benchmarked at close to 40% of the major indices during the dot-com boom, some investment managers felt their portfolios were less risky as long as they underweighted tech to, say, just 35% of their holdings.
That might have been statistically true, but when that 35% they put into tech lost nearly 80% of its value over the next few years, clients were more than a little unhappy. In fact, most of the portfolio managers and analysts who recommended tech stocks lost their jobs. It was a win for common sense (and for the bears).
Fast-forward to early 2017 and tech has arguably has entered a bubble again. I've recently argued that Amazon and Netflix are bubbly in part because they've never really generated cash in excess of their spending. The market has ignored this for years, but that might be changing. For instance, while Amazon initially traded higher on the announcement of plans to buy Whole Foods Market, the online giant's shares have fallen some $125 over the past month.
All Good Things Must Come to an End (Even for Amazon)
"Don't cry because it's over, smile because it happened."
-- Doug's Daily Diary, All Good Things Must Come to an End, Even for Amazon
Of course, Amazon's acquisition strategy isn't new. In the late 1960s, Charles Bludhorn ran a conglomerate called Gulf & Western Industries that was an early proponent of what we now call "financial engineering." G&W used a high-multiple stock to buy low-multiple businesses. This led to an increase in earnings -- and for a fairly long time, a vibrant stock price.
However, Bludhorn and his successors lacked competence to manage their acquisitions correctly, Market cycles and high interest rates eventually caught up with them, and G&W's feel-good story (as well as the stock's salad days) came to an end.
As for Amazon, it officially took over Whole Foods as of Monday, but in my investment career, I've found that food retailing has never been a high-multiple business. Amazon used stock that has a 35x multiple on 12-month-trailing EBITD basis to buy a grocery chain with just an 8x- to 10x multiple.
Now, AMZN conducted no conference call on the deal, and the company only unveiled its strategy last week after the merger received U.S. Federal Trade Commission approval. In a move that surprised no one, Amazon cut some prices on Whole Foods items with pretty inelastic demand. If bananas are 50% lower in price, how many more will you eat?
But despite these moves, Amazon's share price hasn't continued to rise. Undoubtedly, AMZN will increase its revenue estimates -- and widen its projected operating losses -- now that it owns Whole Foods. However, this might lead to a down stock price. Time will tell, but the technical action of the stock isn't encouraging.
Perhaps Wall Street has simply had enough. Certainly with an Amazon-bashing President Trump in the White House, investors might be concluding that change in the political winds is happening. for AMZN.
I'm beginning to wonder if investors can safely buy Whole Foods competitors like Walmart Stores Inc. (WMT) , Costco Wholesale Corp. (COST) and Kroger Co. (KR) . I don't think the Amazon/Whole Foods merger will spell the end for any of them -- in fact, it might be a new beginning. Best Buy Co. (BBY) has clearly learned how to deal with Amazon, and that might get even easier if AMZN's stock tanks.
All Good Things Must Come to an End (Even for Netflix)
And then there's Netflix, with its blank check to buy video content. However, companies like Walt Disney Co. (DIS) no longer want to sell content to NFLX, while new competing content buyers are entering the arena.
This type of competition usually pressures a market leader's stock price. Rivals like Alphabet, Facebook Inc. (FB) and Amazon all have big checkbooks, and the supply of good content isn't infinite. So, expect Netflix's price paid for content to go up.
Netflix doesn't have a stellar record of producing its own content, either. Sure, there have been some winners, but who can name the Adam Sandler Netflix comedies that have been released so far? And by the way, NFLX sells at about 100x 12-month trailing EBITD at a time when other content manufacturers fetch about a 10x multiple.
What about NFLX's distribution network? Is that irreplaceable? Well, the last time I looked, Netflix streamed content over an Internet that has no barriers to entry, unlike cable TV did in the good ol' days. Is Netflix's alleged superior growth (based on an unproven ability to raise prices) worth such a big multiple? And does NFLX have bad accounting, as Barron's recently suggested? Only the markets can decide.
The Bottom Line
You can also click here to see why I would avoid Netflix (but not short the stock).
(A version of this column originally appeared at 8:30 a.m. ET on on Real Money Pro, our premium site for Wall Street professionals and active traders. Click here to get great columns like this from Doug Kass, Jim Cramer and other market experts even earlier in the trading day.)
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