CNBC “Squawk Box” Interview: Tech Bubble To Burst? Still OK To Own AMZN?
Updated: Apr 23, 2021
Nasdaq 5K – Approaching Full Recovery To March 2000 Peak: With broader market averages such as the S&P500 breaking out to new highs, investor questions have grown as the measure that characterized the excess of the Internet 1.0 bubble, the Nasdaq index, fast approaches its March 10, 2000 intraday peak of 5,132.52 with concerns rising as to whether the level will mark a top to the broader market’s advance. Two important measures to consider in assessing whether the broader concern is valid are: 1) the sustainability of the economic fundamentals supporting the advance and 2) the composition and valuation of the companies now comprising the Nasdaq index.
Nasdaq 5K – Non-inflationary Economic Growth Set To Accelerate Off Lower Energy Prices: Apart from excess production capacity in labor, commodity & industrial markets keeping inflationary trends from developing and so limiting the likelihood of rising interest rates, the major economic stimulus for 2015 is the -46% decline in oil prices in 2014. The positive impact of being able to reallocate discretionary income from energy consumption should meaningfully boost consumer and business spending in a wide range of sectors. Historically, there has been a trade-off between energy and technology which we expect should still hold true, especially as technology is a major driver in productivity growth.
Nasdaq 5K – Composition & Valuation Of Index Names Not As Extended As In March 2000: At the peak of the Internet 1.0 bubble, companies with no revenues and massive losses were coming public at $1bn+ valuations. Consider the make-up of the Nasdaq index at present and the vast majority of its constituent companies are growing revenues & EPS and sport well-funded balance sheets. The largest company in the index, Apple, trades at a below-market P/E multiple even before adjusting for its $178bn+ cash balance. Consequently, investors should understand the current market advance is supported by higher quality names operating in an economic environment where accelerating non-inflationary growth will drive faster EPS growth and thus an expected 15%+ stock market advance in 2015.
Nasdaq 5K – FCC Net Neutrality Ruling Favors Internet Growth Names: Yesterday’s FCC 3-2 vote in favor of regulating Internet as utility is positive for Internet incumbents and start-ups alike as non-differential pricing will continue and ISPs will not be allowed to slow traffic deliberately. While critics of the ruling argue that ISPs will slow capacity expansion in the wake of the ruling, it is our view that the growth opportunities and competitive realities of internet access will drive continued capital spending. Those who posture and act to the contrary will be left behind.
AMZN – As Company Is Past Its Seasonal Peak, Time To Exit Shares: The 4Q14 results for AMZN (revs $29.3bn (+15% y/y), Operating Income $591mm (+16% y/y), EPS $0.45 (-12% y/y)), while marking a continued deceleration in revenue growth (3Q14 +20% y/y, 2Q14 +23% y/y, 1Q14 +23% y/y), a fall in trailing twelve-month free cash flow ($1.95bn, -4% y/y) and an EPS decline from 4Q13, represented a surprise against low Street expectations and the shares have since rallied post-results. However, as the results do not to us indicate the beginning of a sustained turn for the better in AMZN profit margins and the company faces weaker economic conditions in significant international markets (e.g. EU), we are inclined to use the post-EPS stock price rally as a selling opportunity. We’ve seen what AMZN could do in its seasonally strongest period, so time to take profits and go home.