Les Billets de Monocle

The Hand of God

18 July 2023

Article this week in the Financial Times by Robert Armstrong - one of the old hands - entitled "The Seven Mercenaries".

He talks about the 7 stocks making the market this year - Alphabet, Amazon, Apple, Microsoft, Meta, Nvidia and Tesla.

He divides them into three groups:

  •  not too expensive compared with the rest of the market : Alphabet, Meta;
  •  the expensive ones: Apple, Microsoft;
  •  the overpriced: Amazon, Nvidia, Tesla.

And he pastes this little chart.


Amazon's market capitalization is $1,300 billion.

For the PE of 50 to be fair, Amazon would have to achieve net income of $26 billion this year.

Over the last three years, Amazon's net profit - excluding the gain then loss on Rivian's valuation - is $17 bn; $18 bn and $8 bn.

In the first quarter of 2023, Amazon made a profit of $3 Bn. Not even close.


Where does the difference come from?

Here :

This is an extract from a recent analyst's report. I won't give you the name of the bank, but it's one of the world's top twenty.

As you can see, there's a $20 billion gap between the operating income reported and the adjusted operating income used by the analyst. The analyst doesn't even explain how he calculates the adjustment, but I imagine he takes out stock-based compensation. This debate is as old as the hills: this charge should obviously be included (a simple test to check: if it counts for nothing, just remove it, and you'll quickly see how employees react).

This is how, with a good "adjustment", we reach a PE of 50 when the real one is over 70.

In other words, if Amazon really had a PE of 50, the stock would be 30% lower.

If the rules no longer apply, the game is obviously different.

It's like soccer: if you're allowed to score goals with your hands, it changes the game.

In 1986 against England, it was Maradona who did it. He pushed the ball with his hand into the English goal. And despite the cameras, the goal went in.

When questioned, he said, "This is the hand of God."


But what does the hand of God have to do with Amazon's accounts?



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