The Race to a Trillion
theirrelevantinvestor.com
theirrelevantinvestor.com
Dot-com bubble had similar group of valuation leaders whose price would not collapse in enforceable future.
The Four Horseman of Tech in 2000 were Microsoft, Dell, Cisco and Intel. Their combined market cap increased by 94% in few months before the bubble crashed. P/E values were MS 60, Intel 50, Cisco 200. There was no reason to assume that these companies would not be important in 20 years from now.
The stock price of __good__ tech companies will not collapse because they stop making profits, gaining market share or growing. It collapses because they are overvalued.
People simply refuse to understand that great companies can't escape massive over-valuation just because they are great companies. Amazon was a great company in 2000, but it took over 10 years before it's stock valuation recovered to dot-com levels.
Apple probably survives a next crash with much less damage than Amazon just based on their P/E valuations and business models. Amazon is in low profit margin business, Apple is in large profit margin business.
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edit: If Amazon long term profit margin is 4%, it must make $1.9 trillion in revenue in the future to to justify current market cap $748 B with 10% ROI.
Retail and logistics are low margin business (~2.5%). Bulk web services will be low margin in the future when the industry matures.
It's very unlikely that any platform business has room, or is allowed to grow, into several trillions per year revenue behemoth before regulators around the world step in.
Another main area for Amazon is Amazon Web Services. It will be extremely low margin business as the dust settles. Just like phone and telecom services or personal computers turned into low margin business, large scale Web services will be very low margin bulk and extremely competitive.
Sure, Retail is generally a low margin business, but there are many caveats to that. Selling toilet paper isn't exactly going to give you double digit margins, but selling fashion might, or digital media.
Amazon's retail business is also structured differently than almost all of their comparables. With 90 million Prime members each paying $100 a year, that's $9 billion in free cash flow.
And I think it's probably foolish to think that AWS is going to end up being a low margin business. It definitely currently isn't, and it has a lot of the standard makings of a software business that can sustain high margins like Oracle or Microsoft. The Amazon offerings aren't just a set of simple web services, it's a extremely complicated suite of offerings that can be used as parts to write software tools in alot of different businesses. And given the amount of capital required to write a suite similar to that and the costs of a company would have to actually switch business applications off of something like AWS, I don't see why this wouldn't be a highly lucrative business.
Massive cash flow and very low margin is the name of the business in retail and logistics.
Amazon will not be the one reaping profits from selling fashion.
Amazon also participates in a huge number of specialty retail businesses that have higher margins as well, like automotive products, beauty products, digital music, games, and video.
I don't think there's any wall street Analyst who would predict Amazon's businesses in maturity wouldn't beat the 3-4% margins you might see at Walmart or Target.
Overall retail margins are very low. 0.5 to 3.5 percent for web-only depending on the sector.
Retail is a complicated beast. Walmart has a operating margin of 2% but return-on-invested-capital of 11.5% , reasonable. Which is more meaningful ? And Amazon has similar math on it's side.
Or let's consider Amazon's 3rd party retail business: the marketplace which probably has healthy margins, combined with fullfilment which is pretty differentiated: 1-day shipping, prime eligibility, largest warehouse network, etc. So maybe decent margins.
1. How much Amazon must make profit per year to justify current market cap If you want 10% ROI?
2. If Amazon has 4% profit margin(2X Walmart), how much it hast to make revenue to get the profits you calculated in phase #1.
3. Consider that world global GDP is around $100 trillion and US GDP is $19 trillion. Do you think that any one company is allowed to grow until it makes 10 percent of US GDP or 1-2 percent of the world GDP? Do you think any company can grow that much?
But when Amazon let's someone else sell on it's platform, it gets a nice margin(today it's maybe 15%!) on money that it didn't even spent!
And sure building warehouses is expensive. But those are fixed costs.
Or that Amazon may kill brands and than own brands at scale, i.e private labels - which some think may be the next AWS.
There are maybe some other types of that stuff going around, so idk if you can judge Amazon as regular retail.
>The stock price of __good__ tech companies will not collapse because they stop making profits, gaining market share or growing. It collapses because they are overvalued.
>People simply refuse to understand that great companies can't escape massive over-valuation just because they are great companies.
You are arguing that Amazon is a good company with good business model, just like I predicted people will do.
What you must do is to take the current market cap of Amazon and then calculate how big it's market share must be to justify it's current valuation. Then you must make a sanity check and compare it to total markets in US and OECD and think if that king of growth is possible.
I do think that this might change next downturn, but this is yet to be seen.
* The Mississippi Company: https://en.wikipedia.org/wiki/Mississippi_Company
* The South Sea Company: https://en.wikipedia.org/wiki/South_Sea_Company
None other than Isaac Newton lost a fortune by speculating in South Sea Company stock: http://www.businessinsider.com/isaac-newton-lost-a-fortune-o...
By the way, we may owe the use of the word "bubble" for describing financial bubbles to the appropriately named Bubble Act passed by Great Britain's parliament in 1720, during the South Sea stock mania: https://en.wikipedia.org/wiki/Bubble_Act
So long term, the use for oil won't be for transport (or ought not to be) but for materials.
That doesn't change the present state though, which is that oil is linked to pretty much everything.
And it really doesn't say anything about the economics of the situation. Batteries can store energy for use on demand, but nowhere near as well as fossil fuels. In the short term, I think the difference is something more than an order of magnitude (~1Mj/kg batteries vs >40MJ/kg fossil fuels; I don't feel like looking up per volume numbers but I imagine I'd see the same gap thing).
By the way, there is still a gap for energy density (i.e. energy/volume), but not nearly as bad. For instance, Gasoline is 34MJ/liter, but after combustion you get about 8MJ/liter. Tesla's lithium ion is about 2.3MJ/liter, so only a factor of ~3 difference.
We don't all have 1000 mile gas tanks. In fact, in a sports car, you might only have a 300 mile tank. So clearly energy storage alone isn't the only metric.
Wear and tear on brakes is much less. Brakes last for about the life of the vehicle. No oil changes are needed. No fuel filter, engine air filter, etc, etc.
Cost for electric is much less. Typically, I pay about the equivalent to $1 per gallon in electricity. There's also a large reduction in local smog and particulates, which can make a big difference in a large city.
This is why we're seeing a continued transition to electric transport, overcoming a century of inertia and trillions in stake. The only major thing preventing electric from taking over the majority of transportation is battery costs. That's it! And batteries have already decreased in costs dramatically to the point that cost of ownership is roughly break even right now even without incentives.
So everybody on that list except standard oil and microsoft , got there that way.
Just be careful on these rapid upticks, and be prepared to bail out if you went in too aggressively.
Do not think of Amazon as a large corporation (even though they are). Instead think of it as a network of startups under one corporate umbrella, with a unified management philosophy. That philosophy is reflected in publicly available documents like https://www.amazon.jobs/principles.
The mature startups spin off an amazing amount of free cash. That cash is reinvested into new startups. The philosophy is that as long as Amazon has a good management structure, and is good at identifying opportunities, their startups will succeed at a higher rate than the general market. You still have to kill a lot of them, but the successes join winners like AWS and fund new ideas.
They can pivot to profitability on a dime by simply killing a lot of their internal startups. They can keep earnings at zero by simply funding new startups.
If you see Amazon's growth stop, or you see them taking profits, then they have shifted to being a different kind of company. Wake up, take notice, and re-evaluate. Until one of those two things happens, their P/E ratio will be ridiculously high and it will not matter.
The two things that I see as long-term threats for Amazon are as follows.
1. Word about how bad they are to work for becomes sufficiently widespread among prospective top employees that recruiting becomes a challenge.
2. Some of their mature businesses start to fail, but are embedded strongly enough in the organization to make getting rid of them hard.
Of those, the first seems closer to being an immediate issue. Though it is hard to believe that their reputation could become SO bad that it would really kill them. The second is likely the bigger long-term threat.
I'd say word about Amazon's working environment is heavily overblown. There are many people who have worked there for years on end and greatly enjoy the experience, and their reputation still allows them the pick of the litter of any Comp Sci/MBA graduates.
Their leadership principles require people to have no defensive behavior. Their actual organization style makes it very easy to create defensive behavior. As long as you and those in your immediate environment are not defensive, the result works very well. However when defensive behavior gets tripped with people who are pretending not to be defensive, things very quickly go pear shaped.
Source, my personal observations from having worked there, combined with many conversations after I left with people who also left. One of whom had not only been there for years, but for most of that time was one of the people who would be brought in to sell wavering recruits because of how loudly he sang their praises as a place to work.
That's not necessarily fair. To the parent's point - if investors get spooked they would bail, much quicker and harder than if traditional fundamentals were there.
You can understand Amazon's strategy while being cautious about certain P/E ratios or fundamentals. The higher it gets the more future growth is priced in and if something goes wrong it could go really bad. The market believes Amazon can dominate any category. That's significant to their valuation. What if you have a failure in grocery and other categories? That peachy confidence could erode quickly.
When you look at Apple's history of identifying worthwhile business opportunities, it was all driven by one man - Steve Jobs. He is dead. And anyone else with his abilities is more likely to create a startup than to join Apple, spend decades rising the corporate ladder, and then reveal an unexpected talent for creating entirely new lines of business that undermine existing ones.
If they're not buying anything they should repurchase stock or pay dividends, but either way, you can totally see they don't have a clear M&A strategy.
I mean, Beats? Shazam?... Apple has the financial power to buy a large supplier and reduce costs by vertically integrating their supply chain but they rather choose to pursue opportunities that have little to no impact on their added revenues.
They keep hoarding cash. None of that cash has been deployed or reinvested in a meaningful way. Their stock repurchase plan and dividend payments have been pretty miserable for a company with that amount of disposable cash.
From the top 10 biggest annual dividends payers in S&P 500, Apple is the most stingy. Their yield is 1.72%. Compared to other companies with yields of up to 5% (like AT&T), that's actually a shitty dividend payout.
Tim Cook announced Jan 17 that he intends to bring most of the money back, and pay close to $40 billion in penalties. Presumably a lot of that will get returned to investors or reinvested in some way.
That's a funny way to pronounce lowered taxes.
Or atleast that's what my current thought is regarding this topic.
EDIT: not sure why the downvotes, but maybe because I'd incorrectly assumed earnings to a non-negative number. Still TSLA's P/E is N/A according to the few sites I've checked:
https://finance.yahoo.com/quote/TSLA/
https://www.nasdaq.com/symbol/tsla
TSLA had price per losses ratio something like -30 last year.
$7.9T in 1617 means about 20-30 billion UK pounds of the era, which is an absurd amount of money, much more than the total worth of all assets in the world at the time.
Don't really have numbers behind it, other than things like a 12-pack of craft beer almost doubling over the past decade.
That's the thing about inflation, you need to look at a large basket of goods to estimate it. Different people feel price increases differently depending on what they buy. It's the aggregate number that matters at the end of the day.
In fact the government's refusal to incorporate housing costs into conventional CPI calculations has been widely criticized as under-estimating inflation. As current official inflation metrics indicate that median incomes have stagnated over the past couple decades, this would suggest that they have in fact fallen. That's why life seems tougher now even though things like food and cheap plastic toys are cheaper than ever
However, a decent counterargument is that since rents are already incorporated into CPI, adding housing prices would be a confounding variable more susceptible to different macroeconomic trends such as equity market inflations. Still, since a sizable percentage of people own houses and an even greater percentage want to own one in the future, I think it's a reasonable metric to add
(If you pay $1500 a month to buy a house where you could rent the equivalent for $1200, is the extra $300 really a cost of living in that area?)
When will the American hipsters craving hoppy IPAs ever think about the economist's productivity statistics?!
In the Midwest craft beer prices went up moderately (but availability of 12 packs is kind of a new thing). Anyway, six packs were $8 and now they are $9, or something like that.
Edit: added [core]
a 15s google search says no: https://www.cnbc.com/id/43769766
>The CPI measures costs in these areas, according to the BLS:
> Food and Beverages (breakfast cereal, milk, coffee, chicken, wine, full service meals, snacks)
Why not? Why such a pessimistic assumption of decline in ability to quickly create value for the rest of time?
They even point out that the East India Trading company, when adjusted for inflation, was a 7.9T company.
https://finance.yahoo.com/quotes/AAPL,MSFT,ORCL,GOOG,INTC,QC...
If you think that the future might be different in that regard, then Google is probably undervalued to you. But keep in mind that things Google is doing in it's moonshot projects, while they generate alot of press, might not generate alot of cash. Interesting != Valuable.