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AMZN's Incredible Lightness of Earnings

At least Amazon's river of no returns has some E, albeit small, to set against P...
 
WE OFFERED a rare recommendation last week, writes Bill Bonner in his Diary of a Rogue Economist.
 
Buy Russian gas giant Gazprom.
 
Who knows? But with a trailing 12-month price-earnings ratio of 2.7, it looked like a Mother's Day gift to us. By contrast, the US internet sector appears to be a kiss of doom – the kind of smooch that would make your face itch.
 
Last time we looked, Amazon.com – the "river of no returns" – was trading on a trailing 12-month price-earnings ratio of 454 and had earnings per share of just $0.64. Compare that with Gazprom, with its P/E of just 2.7 and earnings per share of 106 rubles – or $3.
 
Put one beside the other: Amazon (NASDAQ:AMZN) is almost all P. Gazprom is almost all E. All things considered, we'd rather have the E.
 
Amazon.com is not the only tech star to be all P and no E. Our younger friends tell us Facebook (NASDAQ:FB) has revolutionized the way they get information. They no longer go to newspapers or news sites; they get their news, opinions, and misinformation from Facebook.
 
Maybe so, but it looks more like a big time waster to us. And it's trading at 76 times trailing 12-month earnings. Profits would have to go up 700% before the P/E ratio came down to a reasonable level. Or...the stock price would have to fall by 80%.
 
One of those two things will happen, sooner or later. Our guess is that shareholders won't like it when it does.
 
And how about LinkedIn (NYSE:LNKD)? We used the service, briefly. It was supposed to be handy for making business connections. Did we give up too quickly? Maybe. But at 749 times earnings, it would have to get us an audience with the pope...or a date with Beyoncé...to justify the price.
 
At least Amazon.com, Facebook and LinkedIn have some earnings...however small. Many of these high-flying tech companies enjoy the incredible lightness of having no federal income tax to pay.
 
Online business directory Yelp (NYSE:YELP), for example, has a market cap of more than $4 billion. But it earns nothing after costs – zero...zilch...nada. It's priced at about 18 times sales...and more than 1,000 times EBITDA. Real estate site Zillow (NASDAQ:Z) trades at 16 times sales.
 
If the prices of these tech companies weren't enough to scare you away, consider the control issue. Last week, the media reported that Twitter's stock price has been cut in half this year because of "insider selling".
 
Wait a minute. How come the insiders were selling? Didn't they have faith in their own company? And how did they get so many shares in the first place?
 
Oh, dear reader, you can be so naïve sometimes. Both government and Wall Street are run for the benefit of insiders. You should know that by now. What enterprise isn't?
 
Here, we'll offer a confession: We've been publishing financial research, insights and recommendations for 35 years. Many times people ask us: If you really knew what was going to happen, you wouldn't sell your recommendations, would you?
 
Of course not! We're not that smart. Or that dumb. And we're no angels, either.
 
We research, we think, we study...and we take our best shot. Sometimes right. Often wrong. Always in doubt.
 
That's our business model: Readers pay us to try to figure out how things work...and what's ahead. We wake up in the middle of the night sweating over the Triffin paradox or the Bank of Japan's monetary policy.
 
But if we really knew what was going to happen, we wouldn't sell our advice for 99 lousy Dollars...or give it away for free! We'd keep it to ourselves...stay mum...and place our bets quietly. Please keep this in mind as you read our advice, below...
 
And when Wall Street offers to sell you a share of Twitter or Zynga or Zillow when they IPO...do you really think it is for your benefit? Do you think they are giving you an opportunity to get in on a great investment?
 
Nah...not if they can avoid it!
 
You're the retail buyer...what Wall Streeters like to call "cannon fodder." Wall Streeters will only sell you shares they don't want themselves. They're no angels either.
 
And neither are the insiders who take these tech companies public. They typically keep large stockholdings...which they unload as soon as they are able. Most likely, after the initial enthusiasm wanes. And with some very public exceptions, there will always be more sellers than buyers.
 
And if that weren't enough, the insiders also make sure that they retain control of the money, no matter how many moms and pops own the shares.
 
Facebook insiders, for example, own Class B shares giving them 10 votes for every ballot cast by mom and pop. They will make sure they direct the company's resources to themselves...one way or another.
 
Typically, the shareholders get no dividends...and will never get any substantial piece of the profits.
 
You think it's a level playing field, smoothed and policed by the SEC? You think Wall Street is there to help you finance your retirement? You think that by buying a stock you are a real investor, participating equally and fairly in the Great Capitalist Adventure?
 
Well, think again!
 
Here's a trade that will work – cross our heart, hope to die (well, just cross our heart). Sell those damned expensive US Internet stocks. Buy those cheap energy companies run by corrupt Russian oligarchs.
 
And if it doesn't work out?
 
Here's a true confession of a newsletter guy: It is our best shot. What more can we tell you? Give it a couple of years. If it doesn't work, let's both forget it. We won't say anything if you won't.

Bill Bonner has co-authored a number of New York Times Bestsellers including Financial Reckoning Day, Empire of Debt and Mobs, Markets and Messiahs. In his own opinion, Bill's most recent title, A Modest Theory of Civilization: Win-Win or Lose, is his best work yet. Bill also founded The Agora, a worldwide community for private researchers and publishers, in 1979. Financial analysts within the group have exposed and predicted some of the world's biggest shifts since that time, starting with the fall of the Soviet Union back in the late 1980s, to the collapse of the Dot Com (2000) and then mortgage finance (2008) bubbles, and more recently the election of President Trump.

See full archive of Bill Bonner articles

Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News.

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