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  • Martin Sosnoff

Amazon Vs. U.S. Steel: Cloud Computing Meets A Blast Furnace

I never dreamed of comparing U.S. Steel with Amazon whose market capitalization flirts with $1.5 trillion. Little more than a year ago, U.S. Steel was termed a basket case, trading around five bucks, now $26. Market capitalization was hardly over $1 billion. The country, then in deep recession, suggested U.S. Steel was headed to the scrap pile.

With present market capitalization approximating $7.5 billion, U.S. Steel is now a polite small capitalization piece of paper. The big surprise, U.S. Steel earned over $5 a share in its September quarter, thereby trading at 1 times earnings if annualized. Nothing sells for 1 times extrapolated earnings for very long, but there was such a big bounce.

Meanwhile, mighty Amazon, faced with order fulfillment turmoil in e-commerce, here and abroad, posted most disappointing quarterly numbers. Net income for the September quarter, $3.15 billion, was half year-ago numbers.

Amazon’s quarterly report is filled with a conceited management’s bravado. Its lead sentence is never earnings per share, but rather an operating cash flow number. The previous 12 months operating cash flow is always sizably more than net earnings.

Admittedly, this stat does carry weight. I consider operating cash flow as the signal wherewithal management has to work with to build out its footprints. This was a flat 12-month number. Eight bullet points down the page you find net income numbers for the third quarter, half the year ago total of $12.37.

Amazon’s earnings guidance for me is always a joke, a lowball number toying with its analysts’ following. Quarterly operating income is expressed as anywhere from zero to $3 billion, compared with $6.9 billion year ago results.

You gotta keep digging, hoping to rationalize Amazon’s valuation anywhere near $1.5 trillion. Latest quarter, Amazon made no money in e-commerce. A big operating loss developed in its international business. This won’t last forever, but how capitalize their numbers in a price-earnings model? I’d capitalize Amazon’s retailing business with Walmart, Costco, even Home Depot. Give ‘em a P/E of 25 times earnings. Use 2020’s retailing numbers as a starting point. I’d put the combined international and domestic operating income no higher than a normalized $10 billion.

Even if I put a huge multiple on this business, say 30 times earnings for e-commerce, you don’t get above $300 billion. Unless you believe e-commerce is a $30 billion earner some years out, you can’t tot up more than a $600 billion valuation, about half what we’ve got today.

There’s a gem in Amazon. The AWS computer cloud division, a big player, developed on their own, pretty much from scratch. They’ve got scale, with quarterly revenues moving up 39%, and operating income at $4.8 billion. Alibaba hasn’t made serious money in their cloud startup. Microsoft’s cloud business covers several divisions but their growth rate overall seems lower than Amazon’s, but still a hefty 30%, or so.

How capitalize Amazon’s cloud business? Let’s project AWS operating income at $25 billion next year. Then put a 25 multiplier on this business. We’re then at a market capitalization of $625 billion. On Amazon’s present market capitalization of say $1.5 trillion we are talking about AWS worth 40% of Amazon presently.

Here’s a situation with the tail wagging the dog. A high margin business is overshadowing the enormous infrastructure scope and employment rolls of Amazon’s core business. Everyone extrapolated huge numbers for 5 years to justify Amazon’s lofty valuation.

Amazon as a stock has weathered through its bad numbers. As for U.S. steel, everyone’s memory bank runs deep with disappointments. How dare anyone extrapolate today’s arresting numbers? Certainly not its management who just threw its holders a nickel dividend. This is an insulting, dumb gesture for a company now earning serious money.

Reminds me of what Treasury Secretary Andrew Mellon used to say about business cycles. Mellon saw them as repeatable every 5 years or so. He considered industrialists foolish operators who created their own inventory and capital goods cycles by repeated overspending for plants and equipment.

This was a good call that repeated itself through the sixties. FDR despised Mellon and had the U.S. Treasury indict him for tax evasion. Mellon won his case but died before the decision came down in his favor. We are all indebted to Mellon for founding the National Gallery of Art in Washington, D.C., with his own capital. Mellon, an avid collector of classical art, outfoxed the Russians who foolishly sold him several old masters for peanuts. The Russians sorely needed capital to fund projects like steel factories.

Actually, I shouldn’t own U.S. Steel because I despised such starch white-collar managers. They never hired Jewish boys in their training programs. Neither did Metropolitan Life Insurance and others in the 1950s and early sixties.

Let’s call U.S. Steel’s realized price per ton of steel up 50% this year. The stock ticks at book value, 1 times earnings with $2 billion in cash on a market cap of $7.5 billion. When I pulled up U.S. Steel’s 5-year price chart, I was surprised to see it had peaked at $47 in March of 2018.

Then, the stock traced down in an expert’s ski trail to five bucks in March, 2020, but recently peaked over $30. Alas, few of us ever come into a stock at rock-bottom and later exit near the top.

Amazon, recently peaked over $3,700, but over a 12-month period, no perceptible gain. I keep reading Amazon’s quarterlies, but get cross-eyed in their statistical blizzard. I’m uncomfortable with management’s presentations where as I can understand Microsoft’s presentation and digest it. My position in Microsoft is outsized, but came through appreciation.

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06. Dez. 2021

Martin, Good to see you are back writing!

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