Pretty amusing price action this morning on the back of earnings, up ~10% at present and at a new high.
The jump to 1.44 million customers for Adobe’s Creative Cloud Web-based software came as sales declined 9.7 percent to $1.04 billion in the fiscal fourth quarter that ended in November, the company said in a statement yesterday. That topped the $1.03 billion average of analysts’ projections, according to data compiled by Bloomberg.
Adobe cut its profit outlook for the next three years, as Chief Executive Officer Shantanu Narayen sacrifices income in a push to promote Internet versions of the company’s Photoshop, Illustrator and Dreamweaver applications. While Adobe’s transition to annual and monthly software subscriptions mirrors a broader shift in the way software is delivered, it still hasn’t proven whether this will enhance profitability down the road, according to Josh Olson, an analyst at Edward Jones & Co.
So revenues are down 10% on the "cloud" move but the market likes it.
Well, for now anyway -- the forward EPS projection has a low end a full third below previous estimates, with net income collapsing by 71% over the previous year as boxed-set sales have effectively gone to zero.
There's a further future problem here that nobody cares about today -- the attempt by Adobe to enslave producers of content -- literally. See, if you have a file in one of their formats and created it under a "cloud" subscription, and you them stop paying them, you lose access to your own intellectual property. Now you may think this is great for Adobe (after all, voluntarily submitting to a perpetual vacuum cleaner in your wallet can be quite profitable) but at some point this is likely to result in a massive and possibly-terminal backlash.
Finally, the company is currently trading at some 60 times earnings. Which, incidentally, implies that EPS should be growing at 60% every year for the next five to have a reasonable relationship to price.
But EPS is in fact going down -- net income, remember, collapsed 71%.
Just remember folks, there's no bubble in anything that has a connection to a "cloud" somewhere, and the "cloud" isn't what is occupying your cranium as you watch the market bubble higher and buy these stocks.
That's why Target just reported a quarter with hair all over it and missed as well?
Oh, and Dollar Tree? Same deal.
Sears also had a crap number.
Go ahead folks.... keep buying stocks when, as I've pointed out repeatedly, every dollar that someone "saves" in reduced interest expense as a consequence of Fed tampering with the market comes out of someone else's pocket.
You cannot evade this reality forever.
The initial impact of QE "looks good" if you're the guy who can refinance his house or buy a car at a cheaper interest rate. The back end of that transaction is equally damaging to the person who buys your paper as it is helpful to you.
Net impact? Zero, but it also produces asset bubbles if for no other reason than everyone and their brother showing up on TeeVee to tell you how "wonderful" these programs are for the average person.
What a bald-faced lie that is.
"We're increasingly positive on Amazon shares, given strong revenue growth with accelerations in media and EGM (electronics and general merchandise), both in North America and International," J.P. Morgan analysts said in a research note, while sticking to their "neutral" rating.
Everyone is entitled to their opinion.
You're not entitled to make up your own facts out of whole cloth.
When the so-called "analysts" are forced to lie to support a valuation and market call you know we're playing in the 1999 world where a severe and profound loss of money is about to happen -- and as it was then and in 2008, nobody is going to go to jail for those lies even among the sell-side which is lying for their own pecuninary interest.
And let's face it, the above claim is a bald lie. Internationally both EGM and media growth decelerated and domestically while media grew faster both EGM and "other" (e.g. AWS web service) growth decreased.
Why is this important? Because Amazon makes money, primarily, on media. They make damn little and likely even lose money on EGM. AWS and similar are a tiny (~10%) piece of their total revenue, and while growing the fact remains that (1) it is capital-intensive and (2) while profitable it's not material to the firm's overall operational profile or earnings.
This is a company that sells with a P/E/G ratio of 10, well beyond the 2.0 level that normally breaks "buys" from "Sells." That is, it sells for five times the reasonable "price to growth rate" metric, and yet growth continues to slow, as it has for the last two quarters, especially among the highly-profitable media segment internationally.
On a nine-month basis it's even worse, as there media is barely positive internationally at all, and the nine-month US results strongly suggest that the quarterly three percent improvement may be nothing more than a flash in the pan, never mind that EGM growth deceleration is even more-marked on that basis in the US as well.
There is no growth acceleration except in AWS and related "cloud" services, but there so-called "acceleration" is dwarfed by the shrinking rate of expansion in everything else, especially the high-margin business where the company can make money.
For several years now the story has been "we're investing lots of capital to grow our company" with the un-stated (by the firm) but often-lauded claim made by analysts that when the firm slows this "investment" the difference will immediately flow to the bottom line and voila -- huge profits.
Well, when it is going to happen folks? It appears the answer is never, and instead what you have is a company that is increasing its pace of running on the hamster wheel of ever-increasing cap-ex into slowing rates of growth and return, especially among their high-margin business segment.
I wish to point out that this is the exact business model all those Internet wunderkind followed in the late 1990s and of them the majority actually went broke in the ensuing bust.
This is a recipe for disaster yet the market has, for the last nine months, sequentially ignored these facts.
So be it; that is the typical path for bubbles and mania-style crack-addled "investor" behavior.
But now we have so-called "analysts" that are issuing outright false pronouncements compared against the firm's actual issued financial statements, which leads me to wonder how today differs from "fog-a-mirror" lending and other forms of chicanery, all of which has gone unpunished by regulators but which has a terrifyingly-consistent record of causing ordinary people to lose ridiculous amounts of money when the facts intrude and slap you upside the head.
Wake up America.
So WalMart missed this morning, capping off the traditional season of earnings for the quarter -- right behind Cisco, which offered weak guidance and was pounded in the aftermarket for about 10% (it has since bounced back a little.)
There's a problem here with valuations in the market as a whole, and then there's QE (or the impending lack thereof) and the Pavlovian response that has come into ever-thinning volume.
Where have we seen this before? Oh yeah, I remember -- in the August to October 2007 period, when the market moved smartly higher.... and then rolled over and dove big.
When else? October to the New Year 1999 (a premonition but apparently a false signal) and then again from April until September of 2000 after the Nasdaq broke.
What else is on the clock? A bunch of Hindenburg "Observations" -- the largest such cluster in a very long time.
Finally, we're seeing the terminal phases of a rotational pattern that I repeatedly commented on in 2007 and early 2008 -- this time going back into Apple and Cummins as the rest of the market falls apart.
Formerly-solid indicators of trouble are all flashing red -- Broadcom has gotten destroyed in the last month or so, Intel appears to be rolling over, Cisco got hammered last night. On the flip size Qualcomm is doing ok -- at least holding its own.
But the retail sales figures out recently belie a problem that I've been pointing to for a while -- the softening "non-store" environment, which is particularly ugly for Amazon with it's sky-high P/E. The company is clearly one of the Naz leaders and yet its media business, which is where it makes all its money, is slowing precipitously.
The picture for equities has been dark for quite a while, but the market has been driven higher on the premise that The Fed "PUT" will (a) never end and (b) provide real economic stimulus that turns into actual growth.
(a) may remain in question but the thesis on (b) has always been a pipe dream fed by crack-addled mainstream media "pundits" and "economists" who can't do fifth-grade arithmetic. Pulling forward demand with more debt issuance, which is all "fed stimulus" ever is, is at its best nothing more than a time shift and must be coupled to increasing servicing capability or it simply blows a bubble which will explode and collapse.
History has not been kind to those who have ignored these facts in the past and this time will not be different.
Technically the market has been very strong -- too strong -- for the underlying economic fundamentals. There will be plenty of people who will claim that the next "dip", which is likely starting now, should be bought and they will rush in to try to find "value."
The problem is that this "value" is vacuous and Cisco put a cherry on top of the cake last night with a nice fat layoff announcement (4,000) as well.
If you've been "enjoying" the recent market move just remember that the gains are not yours to keep until they've been reduced to cash, and if you're out on margin, well....... here it comes.
These so-called "analysts" (one of who was just on CNBS) make me want to puke.
Amazon makes almost nothing (gross margin) on sales other than media. Basically, they sell things like electronics at effective break-even.
I give them credit for managing to control shipping costs as a percentage of sales; they pulled that off this quarter. Good.
However, growth in media slowed dramatically in the US and went negative outside the United States.
"Investment in growth"? In what?
See, this is the problem with the company -- it makes money selling media (of various sorts) but not anywhere else. Last quarter I identified a monstrous slowdown in international media sales growth -- and let's remember that international is 40% of the company's gross.
This quarter international media went into contraction.
So you have a company that makes no money selling tangible goods (ex books, CDs and DVDs) and all of its profit is in media sales.
Yet media sales growth is down by nearly half y/o/y in the US and is negative ex-US.
And AWS is monstrously capital-intensive while pricing is under severe attack (the firm disclosed 90% price decreases in "dedicated" instances?! Really?!)
Amazon, in a declining growth environment with their profit center ex-US gone (no growth) and deteriorating in the US despite all their spending is a company that is effectively worth its book value on PPE and cash.
Which is $30/share, more or less.
This stock, along with the market as a whole, is setting up for a 90% crash. The market's sell-side pumpers are utterly desperate to find people to take the bag and prevent value from finding convergence with price.
Ps: I went through this in detail in the Ticker Video last night for those who have access to it.
Where We Are, Where We're Heading (2013) - The annual 2013 Ticker
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