If Bob Olstein is right, within three years Amazon.com will trade at half its current price of $179.
Olstein, who runs the Olstein Funds, specializes in accounting and earnings quality.
He’s not the only negative analyst on Amazon — and he doesn’t hold a position in the stock.
But he’s the only one with a call this bold — and how he got there is half the story.
He passed on the stock 50 percent ago. “We thought it was a good company — just overvalued,” he says. “As part of our process we wanted to know if we made a mistake,” he says. “We saw after making our adjustments that there was no cash flow and so we wanted to see what was really going on there.”
Key to his argument is cash flow — or lack thereof.
On the surface, as of the end of last year Amazon's reported free cash flow (by the normal definition of operating cash flow minus cap spending) was $2 billion.
But after adjusting for a variety of line items, Olstein figured it was more like $71 million.
Among the standout earnings-quality data points: A sharp rise in inventory and payables — the amount Amazon owes its suppliers. Higher payables help make cash flow look better than it otherwise might be by pushing out when vendors are paid. As for inventory: If it keeps growing, Olstein says, “they’ll need more warehouses. This is a highly capital-intensive business. That’s why they have low returns on equity.”
Olstein’s bottom line: “At best this is worth $80, and that’s only if its free cash flow can grow 20 percent a year, over the next 10 years, which maybe five companies have done in their life. And if it can, then in 10 years it’s worth $160.”
Questions? Comments? Write to HerbOnTheStreet@cnbc.com