Amazon.com in a Bubble, RIM (Stock) is in Trouble

At Zerohedge, RIM's earnings shortfall was posted. RIM traded down between 10-15% last night, and is trading down 12.5% this morning in pre-market.

The culprit for the earnings shortfall? A refresh to the Blackberry smart phones is late. It seems that RIM was so preoccupied with the Playbook tablet launch that it neglected its core business. This is never a good thing, but was necessary for RIM.

Let's compare RIM's trading to that of Amazon.com. Amazon announced weaker earnings, with everything on its balance sheet showing that business is amiss. Stock traded down after-hours, but by the next day, it traded up.

A user posted this about Amazon.com (with formatting edited).
The user's website is here: www.lemetropolecafe.com

AMZN

Let's Talk About A REAL Bubble 

I love this quote from the Amazon.com CEO in the Company's press release that accompanied the earnings report: "We love inventing on behalf of customers and have never been more excited about the long-term opportunities."He's probably thinking to himself also: "We love inventing earnings reports on behalf of investors and have never been more excited about the opportunities for this enabled by GAAP and our Government."It boggles my mind that the only investment "bubble" that the financial media sees right now is gold and silver. I'm bored of explaining to people why gold is not even remotely in a bubble.

So let's look at what a real investment bubble looks like.

AMZN's total market cap is $90.4 billion. Now, AMZN announced that its latest operating income was $322 million vs. $394 million in Q1 2010. That's an 18% decline. Based the latest trailing 12 month cash flow just over $3 billion, AMZN is trading at 30x cash flow. When a normal company trades at anything over 5x cash flow, you expect that to be because you expect a very high rate of cash flow growth. BUT, AMZN's operating income, the largest component of cash flow, dropped 18%. Think the market is being insane about the prospects for AMZN's growth?

AMZN also announced that the operating income for next quarter would be between $94 million and $245 million. This is an incredibly wide variance in guidance and it blows my mind that the market has tacked on over $3 billion in market cap to AMZN for a company that can't project its cash flow expectation for Q2, which already 33% over! This is insane.
Let's give Bezos the benefit of assuming Q2 operating income will come in at the midpoint of $170 million and annualized that number, which is generous considering that operating income is now declining at double digits. This yields a forward operating income projection of $680 million. 

The stock thus trades at 132x operating income! THAT MY FRIENDS IS A BUBBLE.

Please note, we're not even talking about net income and p/e ratios here. Amazon's accounting is so obsfuscated by GAAP exploitation that I would more likely believe in the Easter bunny than I would Amazon's reported numbers.

So what's the deal? I used to track and untangle Amazon's accounting pretty closely up until about 8 years ago. I fatigued waiting for the SEC and NASD to crack down on AMZN'saccounting shenanigans. Of course the employees in those two organizations spend more time surfing porn than they do enforcing the law. The basic "crux" of Amazon's accounting exploitations has to do with how they account for fulfillment, marketing and shipping expenses. These are major major expenses for Amazon. Now, I don't have time to dissect its last 10K today, but I assume that they are still doing the same thing they were doing 8 years ago, especially since the source of their operating income cliff dive will be from these expenses.

In a nutshell, Amazon "buys" revenues by spending a massive amount on the process of getting you to buy from them. This includes subsidizing the price you pay by charging less than competitors and offering huge shipping deals, often extending free shipping. To be sure, they have negotiated favorable shipping deals with the big shippers. HOWEVER, they do not recognize the costs involved in all of this as they incur them, choosing instead to "capitalize" the majority of these costs. It's a "cost accounting" manipulation that is far too complicated for the regulators to understand. I don't have to go through the footnotes of their financials because all I had to do was read their press release to know they still do this.

Feel free to see what I mean HERE In the 7th paragraph they detail the nature of what I call their ramped up "revenue buying" programs.

The fact of the matter is that Amazon is one big ponzi scheme and as long as they can continue growing revenues, even at the expense of reporting declining operating income and cash flow, and as long as the stock market keeps inflating the AMZN bubble, then this scheme will continue. But believe me, the fact that their revenues are still growing at double digits AND their operating income is plummeting by double digits, tells me that they are getting a lot more desperate and aggressive at "buying" revenues.
Eventually this will come to an unhappy ending for everyone except the CEO Jeff Bezos, who sells millions of shares every quarter.

I would too if I were him.

In the meantime, I often buy from Amazon because it is convenient and, if they want to subsidized the cost of getting a product to my house, it is a lot cheaper in terms of what I pay plus the time involved and I love a "free lunch."

The bottom line for me is that I know that if I had time I could show you how Amazon likely loses money every quarter on a net income basis. I focus on operating income and cash flow because those are the numbers AMZN highlights in its press release. This harkens back to the tech bubble days when "pro forma" accounting was inserted in the financial media in place of true GAAP accounting. Now all tech companies use "pro forma" accounting and the stock market is conditioned to use it too. But even the operating income numbers they report are manipulated and dirty.

If anyone is interested, the footnotes in the last 10K will give you the keys to backing into somewhat real numbers. But we would need to see the inside books to see the golden truth.

Cisco Systems

Cisco Systems, as investors already know, designs, manufactures, and sells Internet protocol (IP)-based networking and other products related to the communications and information technology industry worldwide (source: Yahoo Finance).

When the company reported earnings that greatly disappointed the markets, the stock fell considerably. Cisco Systems is failing, because it is getting too big, its product line too large, and the company appearing unfocused. Competitors are succeeding in markets where Cisco neglected, namely Riverbed and Blue Coat Systems. See chart below.

After reviewing its quarterly results during the quarterly earnings call, management was guiding analysts on the upside, over the longer term.

It will take some time for its new products to ramp up, for margins to improve, and for profitability grow.

On Seekingalpha, there was a debate on Cisco. Is the company undervalued? In the article, one comment that stood out was this one, by user NetEng. Once in a while good opinions pop out. It is like finding a needle in the haystack:

Most analysts do not comprehend the extent of Cisco's technology, which is exemplified by the Trefis chart in the above article. Add to that Cisco's upper management doing a poor job of explaining Cisco's new technology, and the result is that many analysts are commenting on and evaluating the Cisco of the past, and, moreover, using a technological framework that is fast receding into history.
Take the notion that Cisco is a "router and switch" company. While Cisco has done and continues to sell Ethernet switches, the data center model based upon top-of-rack Ethernet switches with multiple 1U servers is now becoming obsolete, especially to Cisco. The key technology is the Unified Computing System (UCS) which along with the Nexus 1000V virtual software-based Ethernet switch, can and will eliminate the top-of-rack/multiple physical server data center as we know it. The top-of-rack Ethernet switch is the technology targeted by HP and others. But for Cisco, there no longer exists a top-of-rack Ethernet switch, as it is now replaced by the Nexus 1000V virtual switch. The UCS system, using VMWare virtualization is able to replace the physical servers. Who supplies the physical servers today? Primarily HP, Dell, and IBM. So UCS is a direct threat to the server vendors' data center market.
Also Cisco, along with Brocade, is a major player in Storage Area Networks (SAN) technology, sharing the market with Brocade for the large Director class SAN switch technology at 50/50%. Many SAN innovations have been invented by Cisco over the past 7 years, such that it is fair to say that, contrary to most analysts perceptions, there are only 2 players in the SAN market: Brocade and Cisco.
Why is UCS important? By virtualizing physical servers, and eliminating top-of-rack physical Ethernet switches, a 5000 square foot data center can be shrunken into a 250 sq ft area with consequent electricity, cooling, and space savings. Think vacuum tubes vs transistors, when conceptualizing UCS/Nexus 1000V vs existing physical servers and top-of-rack Ethernet switches.
Senior Cisco management, simply has not gotten the word out, and analysts often speak in so much generalities that it is clear that they don't really understand what they are commenting on. How many data centers have most analysts built, for instance?

Finally, the economy is really, really bad, despite the rosy picture painted by most commentators. Reduced profits, smaller margins, are classical symptoms of a macroeconomic lack of demand, and warning signs of deflation. The Fed, and many economists are still sounding the cry that the economy is still very bad, and possibly getting worse. So, an alternative view is that Cisco is not losing market share, but still has the same share of a shrinking market ( think state and local government austerity cuts, which eventually hit Main Street).

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As QE2 or quantitative easing via POMO unfolds in the United States, look for U.S. currency to weaken.

Companies in the energy and gold sectors will benefit as demand for these commodities increase. Credit easing will also increase risk tolerance, which will support expanded price-earnings multiples for the stocks (investors will be eager to pay a premium).

Therefore, oil and gold companies would be an area of interest for investors.