Daily Archives: November 21, 2017

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Why Investors Should Be Concerned About Amazon.com, Inc. Stock

Amazon.com, Inc. (NASDAQ:AMZN) appears poised to take over the world. From groceries, to streaming, to its original business of retail, Amazon seems to succeed at everything it does — and AMZN stock reflects this.

The stock prices of competitors fall at the mere hint of having Amazon as a competitor. Dozens of cities have offered billions in tax breaks to secure its second headquarters. However, amid its popularity, a pattern of history repeating itself has emerged.

And this pattern bodes poorly for AMZN stock.

Historical Patterns Should Concern Holders of AMZN Stock

Amazon is becoming the new Wal-Mart Stores Inc (NYSE:WMT).

In roughly a generation, Walmart emerged from obscurity in rural Arkansas to become the world’s largest retailer. Walmart’s bulk pricing, advances in supply chains and, eventually, the power to force supplier cost cuts made WMT a retail behemoth that everyone feared — much like Amazon today.

However, other companies caught up on pricing and surpassed Walmart on product quality. Furthermore, reports of poor working conditions cut into WMT’s popularity and, eventually, its stock price. Unfortunately for owners of AMZN stock, some of the same trends have emerged at Amazon.

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Amazon has failed in many areas. Reports of poor working conditions have become more frequent. Stories of product failures have also emerged. As my colleague Dana Blankenhorn mentioned, the Amazon Fire smartphone did not burn its competitors. Amazon Register also failed to defeat tiny Square Inc (NASDAQ:SQ) in the credit card reader market. Moreover, the Amazon Prime streaming movie offerings never became a threat to Netflix, Inc. (NASDAQ:NFLX). While AMZN succeeds in many areas, it has failed on many occasions as well.

Yet, despite the failures, Amazon’s reputation for success and growth drive the AMZN stock price. AMZN trades at nearly 300 times current earnings. Revenue growth has averaged over 23% per year over the last five years. This is an impressive feat for a company with a market cap of close to $550 billion. Along with a 5-year average net income increase of 30%, high growth metrics have driven Amazon stock to over 22 times book value.

Amazon Isn’t Declining… Yet

The long-term worry involves the stock following in Walmart’s footsteps and experiencing a slowdown in growth. As a comparison, Walmart trades at 23 times earnings and less than 4 times book value. Its growth has slowed to an average of 1.7% in terms of revenue and income has actually been declining — to the tune of 2.8%. Matching Walmart’s PE ratio would bring the AMZN stock price to below $100 per share.

At least for now, the hunter has become the hunted. The fear Walmart once inspired has been brought forth on Walmart itself by Amazon. Competitors such as Target Corporation (NYSE:TGT), Costco Wholesale Corporation (NASDAQ:COST) and Kroger Co (NYSE:KR) have also seen stock declines by the mere presence of Amazon in markets they compete in.

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Additionally, the company hasn’t followed in Walmart’s footsteps in all areas. Amazon founder Jeff Bezos remains alive and in charge. Walmart’s decline began long after founder Sam Walton passed away.

Walmart’s decline also occurred over several years. Amazon analysts still expect profits to double most years into the foreseeable future. However, double-digit growth remains difficult to maintain as a company grows larger. And if AMZN loses its reputation for taking over business niches, investors will stop paying 300 times earnings.

Summary

The successes and emerging problems with AMZN stock place the company in the same historical pattern as another successful retailer — Walmart. Amazon’s market takeovers and tremendous growth have inspired both fear and respect in other companies.

Stocks swoon at the threat of Amazon. Dozens of cities have also offered incentives to attract the company’s second headquarters.

However, high valuations, product failures and reports of poor working conditions should concern investors. All these could change the company’s reputation for the worse and drive AMZN stock price to much lower levels.

Investors wanting bigger returns should look for the next AMZN… and avoid the current one.

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Source: Investor Place

Cryptocurrency

Crypto Community Remains Extremely Bullish on ICOs

Dear First Stage Investor,

Cryptocurrencies are flying high. Initial coin offerings (ICOs) have already raised a record-breaking $3 billion-plus this year.

But last weekend, as my plane circled over LAX and prepared to land, I was curious…

Was the crypto community overconfident? Was there going to be an obnoxious level of self-congratulatory backslapping at the conference I was invited to?

I was about to find out.

StartEngine held its ICO 2.0 Summit in Santa Monica, California, last week.

I was going to hear a dozen-and-a-half ICO pitches… and was hoping to walk away with one or two that captured my interest.

(As it turns out, I did find one… a potential First Stage Investor portfolio recommendation. It’s an exciting investing opportunity that addresses a gigantic market in an extremely clever way.)

As I feared, there was a little too much cheerleading. No one mentioned a day of reckoning. “A bubble? So what?” was a comment that neatly captured the mood of the conference.

But, to this particular crowd’s credit, these people weren’t totally oblivious to some of the issues casting a shadow over the crypto space.

Their biggest worry? The Securities and Exchange Commission, followed by the possibility that crypto is in a bubble.

Here are some of the more interesting comments I heard on these and other areas of concern…

What Will the SEC Do?

Several lawyers I talked to mentioned the big clue that SEC Chairman Jay Clayton gave just two days prior to the conference.

During unscripted remarks in the middle of a speech at the Institute on Securities Regulation in New York, he said, “I have yet to see an ICO that doesn’t have a sufficient number of hallmarks of a security.”

While some disputed the legal basis of what Clayton said, the lawyers I spoke to at the conference mostly agreed it’s a strong sign as to which way the SEC is leaning as far as ICO regulation.

(This gets into the legal weeds about what qualifies as a security, an issue that deserves its own post. I’ll be writing about it soon after the Thanksgiving holiday.)

If, as feared, the SEC rules that digital coins are actually securities and thus subject to securities regulations, that would make ICOs more complicated and expensive.

Sara Hanks, the CEO of CrowdCheck, said that ICO entrepreneurs should think very carefully about doing an ICO outside of a security designation.

“Even if you have a ‘Plan B’ to revise the legal status of your ICO after the fact, if the SEC says they’re a security, you’d be going down a very expensive path,” Hanks cautioned.

As for the “no harm, no foul” point of view? Hanks pointed out that “a lot of consumer complaints would trigger fed action.”

“The SEC doesn’t hate tokens, but it does hate fraud,” she said.

With consumer complaints on the upswing, this is no minor point. So far this year, the crypto exchange Coinbase has been named in 330 complaints involving hacking, compared to just seven in 2016.

Howard Marks, the CEO of StartEngine, framed the issue best. He said that bringing ICOs out of the shadows and making them compliant with the law is the ICO community’s greatest challenge.

Bubble Behavior?

The issue of a possible crypto bubble was raised several times at the conference. But it was typically raised as a red herring, only to be dismissed by the person who raised it.

Lou Kerner, a partner with Flight Ventures, basically echoed the view that Adam and I have been putting forth.

IT’S EARLY.

Kerner likened crypto’s current state to where Amazon was after its first few years. The stock had risen from $1.50 to $86, an increase of 57X. Is that a bubble?

The online retailer is now trading for around $1,135. Kerner said crypto’s current slide is a blip. There’s no bubble. “Wait 20 years and you’ll see,” he said. Point nicely made.

Mike Jones, CEO of Science Inc., said that bubbles burst when demand contracts. Demand for cryptocurrencies, he said, is rising and will continue to rise.

He’s right. We’ve pointed out that bitcoin exchange Coinbase is adding a mind-blowing 40,000 to 50,000 new users per day. And the institutional investors haven’t even climbed on board yet!

“It’s still too early – even with securitized ICOs,” Jones said. “Institutional investors are simply not interested and remain on the sidelines for now.”

Just one brave person admitted the possibility of a bubble (in ICOs, not cryptocurrencies). Others took issue with his view.

Miko Matsumura, the co-founder of Evercoin, for example, likened the ICO market to a pillow fight. He pointed out that ICOs comprise only $2.5 billion, or 1.2%, of a total crypto market of $208 billion.

“Nobody is getting seriously hurt,” he said. “Everyone has experienced massive gains… and lots of folks are having fun.”

We’ll see if the SEC buys that argument. It’s not known for its fun-loving ways.

A Trio of Concerns

There are several concerns that are definitely worth keeping in mind for ICO entrepreneurs.

  1. Global issues. One entrepreneur who’s in the middle of an ICO campaign told me he had to hire a lawyer in every country he wants to offer coins in. Each country has different rules and regulations about such offerings. He said it’s very complicated, not to mention expensive.
  1. The “know your customer” process. ICO campaigners who ignore KYC rules risk the wrath of the SEC, said Hanks.
  1. A cult of decentralization. Not all smart contracts (on the blockchain) will be enforceable. In the real world, not everything can be decentralized. I was impressed that such a blasphemous point of view was put forward at a crypto conference. Meanwhile, all 15 ICO pitches I heard pushed some form of new decentralization.

Disrupt/decentralize ridesharing? There were two pitches just on this intriguing idea. It’s something to chew on.

The Most Intriguing Fact I Heard

Fidelity has a team of 25 people working full time on crypto. I knew CEO Abigail Johnson was a big believer in crypto, but the news about the team was surprising.

The amount of money sloshing around in the U.S. stock and bond markets totals more than $26 trillion and $31.2 trillion, respectively. If Fidelity can figure out a way to turn a tiny slice of this market into ICO investors, it would be a major coup.

And it would keep the crypto/ICO markets humming along for many years to come.

Good investing,

Andy Gordon
Co-Founder, Early Investing

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Source: Early Investing