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Billionaire hedge fund manager David Einhorn has been using the word “bubble” for a while now. Now he’s warning of an Amazon stock bubble.
No, Einhorn doesn’t think the whole stock market is caught in bubble territory. In fact he’s quite bullish on gold and some stocks including Apple (Nasdaq: AAPL) and Marvell Technologies (Nasdaq: MRVL), with Apple being a top recent performer for Greenlight Capital. But he does argue that certain high-flying tech stocks are caught in a bubble. Einhorn announced earlier this year that he was shorting a basket of stocks that met certain bubble criteria.
Einhorn all but announced that he had added Amazon (Nasdaq: AMZN) to this list in his most recent quarterly letter to investors of Greenlight Capital, his hedge fund.
To paraphrase Einhorn’s argument from earlier in the year about certain stocks being in bubble territory, Einhorn believes that “there is clear consensus that we are witnessing our second tech bubble in 15 years.” He goes on to cite “the rejection of conventional valuation methods,” and “huge first day IPO pops for companies that have done little more than use the right buzzwords and attract the right venture capital.”
As it pertains to Amazon, Einhorn believes that investors have been willing to pay sky-high premiums for the stock because of high growth rates even though it isn’t bringing in big profits due to massive reinvestment. He sees this as another example of investors abandoning traditional valuation metrics and that this is a mistake.
We added to our exposure of “Bubble Basket” shorts. AMZN’s recent disappointment is notable in that for years, the story has been that AMZN isn’t profitable because it is growing so fast. Now growth is slowing, but rather than unleashing higher profits, the slower growth is leading to even greater losses. One of the principal bullish assumptions supporting many bubble stocks is, “the company is growing too fast to be profitable.” We think AMZN is just one of the many stocks for which this narrative will ultimately prove false.
As I wrote back in April, Einhorn believes that momentum investors have been willing to ignore traditional valuation methods in favor of metrics like average monthly users, total addressable market and price-to-sales ratio.
But once the tech bubble burst, these companies were again measured using traditional metrics just like the rest of the market. And when you looked at companies like Pets.com on a price-to-earnings basis or with other conventional metrics, they suddenly seemed worthless – or close to it.
Even Amazon, which was one of the healthier Dotcom-era companies and ultimately a survivor, fell 93% when the bubble burst in the early 2000’s.
Einhorn previously said that his criteria for selecting stocks for the Greenlight Capital “Bubble Basket” was that there be at least 90% downside if and when the market reapplies traditional valuation metrics.
Though he didn’t explicitly say that Amazon is in his basket of bubble stocks, he hinted pretty strongly at it. And if Greenlight Capital did indeed initiate a short position in Amazon it means Einhorn believes there is an Amazon stock bubble with at least 90% downside.
Thus, Amazon buyer beware.
Disclosure: I personally own shares of Apple.
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