Walmart, Washington, and the Fed could break Amazon’s trillion-dollar bubble.
Amazon is a great company. It has made some investors very rich. Those who purchased its stock back in the 1990s and held on to it that is.
But at the current valuation its stock is in a bubble territory, according to a couple of metrics. One metric is its PE ratio, which is four times that of Walmart. Another is its share to the American GDP, which is close to 5%–see table.
|Company/Country||Market Cap/GDP||Forward PE||PEG|
To be fair, Amazon’s bulls could find other metrics to justify Amazon’s current market valuation. Investing.com analyst Clement Thibault is one of them. “What strikes me the most is how little time it has taken Amazon to reach this milestone. It really emphasizes how we’re in a ‘super-market’ for tech stocks,” says Thibault. “Amazon really has been a stellar story of growth. The cloud operation, the backbone of its profits, allows it to do so much more than a ‘traditional’ company is capable of.”
Still, everyone who has followed Wall Street long enough knows what happens to bubbles in the end. They burst, costing investors who jumped into the market at the wrong time big money.
What could burst Amazon’s bubble? Three things.
One of them is competition from big retailers like Walmart. A couple of weeks ago, the retail giant reported a more than 2% increase in customer traffic and transactions. Online sales jumped 40%, up from a 33 % in increase the previous quarter.
Equity analysts cheered Walmart’s results and the strategy behind them. “We see Walmart’s recent results including ongoing traffic growth, accelerating e-commerce growth, sales growth and share capture as a function of its strategy to offer value, invest in technology that is integrated into store assets (online grocery pickup lanes and in-store pickup towers are examples), leverage scale, and focus on strong execution,” observes equity analyst John Zolidis. “We believe the market may be starting to anticipate and reward retailers that make investments to take share and reposition for long-term success.”
Then there’s the prospect of regulation coming from Washington, which hasn’t been terribly friendly to on-line giant and the other companies that are included in the popular FANG group..
And there are higher interest rates raise the cost of funds, especially for investors borrowing from their brokers to up their equity bets, at times of euphoria (margin borrowing).
Higher interest rates, in turn, set the stage for the next stock market crash, as alternative risk-free investments become more appealing than stocks.
That’s what happened between December 1986 and October 1987. A climb in the 10-year U.S. Treasury yields from 7.19% to 10.23% was followed by a 200-point drop in the S&P 500—see table.
A similar pattern was repeated a decade later, when a climb in the 10-year U.S. Treasury yields from 4.70% to 6.20% was followed by a more than 1,000-point decline in the S&P 500. And more recently, in 2005-7, when the S&P 500 dropped 940 points following a climb in the 10-year Treasury bond yields from 4.24% to 5.17%.
Will history repeat itself? It remains to be seen.