The 17-18 century companies are of course not adjusted by inflation, they are adjusted by nominal GDP, i.e. as a fraction of the worldwide or their host country GDP.
$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.
The same absurd premise that causes people to think eg Rockefeller's peak wealth adjusted should be more like $400 or $500 billion today (when in fact it would be closer to ~$30 billion using an inflation adjustment from the early 1900s).
I haven’t checked the numbers but those stocks trade 5-7x higher so it makes sense you would see lower volume. Multiply by price to see size of market. Or am I misunderstanding?
Considering Google, do you guys(and gals) think that Their moonshot factory and the businesses it created is factored in the price ? or that the stock market isn't good at factoring things at such early stage, but if we have good reason to believe that they'll do well in that area, Google is a good investment ?
For the most part, Google's moonshot business have been a negative value to the firm. They've poured billions of capital into a number of these businesses without anything demonstrable to show for it.
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.
Oil is part of the composition of so many products. It's also still an essential component to moving things around the planet. So when you decide to have that burger whose ingredients were was transported using gasoline cooked by a staff who drove to work, and the bottled water whose plastic bottle was made from oil and transported with gasoline, a percentage of the money you paid for those items slides into the revenue stream of oil companies. When you have an industry which is able to shave off a percentage of the vast majority of products moved, sold, and consumed in the world you've got a huge financial advantage.
Most of those things can be electrified. Even plastics could be electrified (i.e. use electrolysis to produce hydrogen from water and electricity, Sabatier reaction to combine that hydrogen and CO2 into methane, make the methane into various products. Or use electrolysis on the CO2 to make CO and combine that with hydrogen to make methanol and then polypropylene, or just use the Fischer Tropsch reaction to produce synthetic oil from hydrogen and CO as a kind of drop-in replacement for fossil fuels), although I'd bet that we'll just use oil due to the large inefficiencies involved.
So long term, the use for oil won't be for transport (or ought not to be) but for materials.
I'm pretty happy to accept that, theoretically, any form of energy could be substituted for any other form. So sure, you can swap electricity in for oil.
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).
The difference is about an order of magnitude if you include the inefficiency of combustion. But specific power is just one metric. There are many others, which are often (i.e. for commuting and even cross-country shipping) better for battery-electric.
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.
Not just oil companies -- state owned oil companies. It's relatively easy to be worth alot of money if you have a monopoly on an entire country's resources.
Interesting too when you look at how many people are skeptical of Tesla. They might fail, but they are in a posture to try to displace the entire transport chunk of the oil industry.
I have a pet theory that we've been systematically under-estimating inflation for the past many years, and that all these sky-high market caps are really the result of the dollar not being worth as much as we all think.
Don't really have numbers behind it, other than things like a 12-pack of craft beer almost doubling over the past decade.
> 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.
Right. Commodity resources have pretty much universally decreased in price (relative to average income) as countries develop. The same can not be said for other areas such as housing and medical care.
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
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.
Do you know if housing is included? Seems like if you tracked inflation as more of “indexed cost of living” it would be skyrocketing the last 20 years.
From BLS, CPI basket is " eight major groups (food and beverages, housing, apparel, transportation, medical care, recreation, education and communication, and other goods and services)." https://www.bls.gov/cpi/questions-and-answers.htm#Question_1
This is not true. There is no single "CPI": the BLS actually calculates multiple indices. "Core CPI" excludes food and energy, but other indices include them. Some reporting organizations might use "Core CPI" when reporting inflation and not mention this, but that is their fault, not the fault of the index.
That's not true: https://www.bls.gov/news.release/cpi.nr0.htm. Though sometimes people look at the non-food/energy components separately because they're less volatile (supposed to be a better predictor of future inflation).
Craft beer isn't a good staple to base price measurements on, the industry is affected by regulations that other industries don't have to bear (liquor tax, compliance regulations, etc). Also craft beer is susceptible to fads and popularity, so it can experience "fashion pricing".
You may be more right than you know. See Kevin Philips' "Numbers Racket", May 2008 issue of Harper's Magazine, and/or other insights on the consumer price index methodology and inflation.
There's alot of research that goes into this, not just the CPI but other measures of inflation. Check out http://www.thebillionpricesproject.com/ from MIT. Economists don't just sit on their butts all day.
It's not really adjusted for inflation, though. It's adjusted for what percentage of the world's GDP at the time it constituted. That's a metric that favors older companies because there was a much smaller number of companies at the time.
I think people don't like counting it because of the way it was achieved. IIRC they only floated a super tiny percentage of their stock and so the overall valuation was inflated. It felt then a little the way cryptocurrency market capitalizations feel now.
Especially when Dutch East India and South Seas were actual states in almost every way except name. Once you have an army, provide services and collect taxes you are a state.
We should be careful with these types of articles and claims. Apple is trading at 18x earnings while Amazon is trading at 250x, as of this comment. Lower P/E ratios point to sturdier valuations in the market. In other words, AAPL is ACTUALLY worth its valuation in the eyes of the market, whereas AMZN would be dumped quickly should something spook investors.
Just be careful on these rapid upticks, and be prepared to bail out if you went in too aggressively.
This is because some of the successful businesses have learnt to build on their existing success. This is an evolution of previous generation of successful companies which mainly relied on working on one main idea. Now its become easier to built up on the infrastructure provided by previous generation's success.
Or atleast that's what my current thought is regarding this topic.
It's really shuffling money from earnings into expanding an existing company is tax-advantaged. Let's say I own 100% of ACME, which made a $100 profit last year. Rather than receive that money as dividends and then reinvest it, which causes the money to be taxed now and for it to possibly be taxed at a higher rate than capital gains, I reinvest that money into ACME. This has the effect of deferring taxation on that profit and allows it to be taxed at the same rate as capital gains at a later date
Price to Earnings less cash is probably a better metric anyways. If you take away the ~250 billion in cash that Apple has on their balance sheet, you end up with a P/E of around 12-13, which is a little below average historically.
Ppl said that argument a year ago, 3 years ago, 5 years etc. AMZN has never been cheap by traditional valuation metrics. What one has to look at instead are operating margins and growth, both pf which are very strong.
A large cash stash signals a failure to identify worthwhile business opportunities. For other companies it'd be an ominous sign. For this one? Maybe it's like the OP's observation that a PE of 18 is now considered low.
For Apple specifically, I consider it a particularly ominous sign.
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.
The amount of cash they have now isn’t comparable to what they had when Steve was alive. They have huge takeover money now. I think they’re saving it for a rainy day ie the next crash. Current valuations are historically very high, and it would be imprudent to start buying up companies now. They’ll get much more value if they wait, which they have been doing quite patiently.
Apple has been sitting on large amounts of cash for several years and has yet to take a decision on how to use that cash.
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.
Never at the scale of their cash reserves and cash growth. In 2014, Apple had 100 billion in cash and now 4 years later they have 250 billion in cash. During the past 10 years, Apple's average free cash flow per share growth rate was 31.40% per year.
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.
That's because they have it all locked away in tax shelters.
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.
If he simply continued to do what he is already doing, he would pay $0 in taxes..indefinitely. Viewed that way this is clearly a penalty for changing course.
not true, amazon can always dump costs. P/E is meaningless beyond a certain ratio, at that point it just indicates that the business is growth oriented and reinvesting its profits
The more important number here is the revenue to market cap ratio, which is very similar for both Apple and Amazon. Earnings numbers are fairly arbitrary for businesses that aren't being operated in a steady state.
I had assumed this to be because their earnings were so small. For example Tesla has an undefined P/E ratio since it's a divide by zero. I had also assumed this to occur when a company sacrificed short term profitability for higher adoption.
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:
Anyone who thinks that Amazon's P/E ratio is meaningful of anything don't understand how Amazon operates. Full stop. Amazon has the choice between growth or earnings and is choosing growth into new lines of business.
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.
> 1. Word about how bad they are to work for becomes sufficiently widespread among prospective top employees that recruiting becomes a challenge.
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.
What they are like as an employer tends to be a binary experience. It is great until it is not, and afterwards you don't know how you ever managed to stand it.
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.
> Anyone who thinks that Amazon's P/E ratio is meaningful of anything don't understand how Amazon operates.
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.
Here's another scenario: Jeff Bezos goes on sick leave or sabbatical. I'm not sure anyone knows who is going to take over Bezos. For all the talk about Steve Jobs's health when he was at Apple, at least he left a lasting legacy and Apple went on to greater heights, in terms of financial and operational performance, under Tim Cook.
Amazon, google and Facebook..three companies to rule the world. They have been great investments I predict they will remain so for the foreseeable future. They won't suffer from the same sort of diminishing growth and loss of market share that afflicted other large companies. Google dominates mobile advertising and search; Facebook also dominates mobile advertising and social networking, and Amazon dominates commerce and business/e-commerce infrastructure. Microsoft is also a good investment.
How will Facebook avoid lower growth? Or are you meaning financials rather than users? They just had a quarter that had some concerning metrics (usage among young people for example) and are surely up against world population limits at some point.
They own Instagram, in which in retrospect was a huge success. The financial growth comes from branching out into different industries and extracting more value from existing users.
Exactly, it's worrying to think of how powerful Facebook could have been if they had successfully bought Snapchat back in 2013 like they tried to do; its usage amongst young people is very high and they'd have easily dominated every age group in terms of social media.
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.
It's a bit of a simplification to call Amazon a low profit margin business -- Amazon is a lot of different businesses each with their own margin considerations. And most of Amazon's businesses we won't know the real margins they'll deliver until maturity a number of years out. There's only a few categories on Amazon (books, digital media, etc) that have already reached maturity and won't see any margin expansion over the next ten years.
Most of Amazons business is retail oriented. Retail is very low margin business.
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.
Depends on how you define "most", "retail", and "business".
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.
There's a lot of reasons one could expect Amazon bucks many of these trends. Prime subscriptions, Amazon Marketplace, and Fulfillment by Amazon are all them leveraging their infrastructure for selling additional bottom-line contributions.
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.
Amazon can only grow if it encompasses almost all market segments. Picking retail margins by sub-sector is not helping there will be reversion to mean.
Overall retail margins are very low. 0.5 to 3.5 percent for web-only depending on the sector.
I thought retail, where businesses have to expend tons of capital on inventory (or get large lines of credit), is the definition of a low cash flow business. If the majority of your cash flow is entirely spoken for by debt servicing costs (aka, avoiding certain death by default), then it's not really a large free cash flow.
Amazons fakes problem - Fashion brands distrust Amazon a lot as they’ve been burnt badly by amazon selling fakes. Amazon excels at selling cheap stuff that need to be ordered repeatedly or hard to find parts and knickknacks.
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?
Let's see: the reason Walmart gets such high returns on low-margims, is because it knows how to rapidly sell hoods and thus reuse cash. And that is half of current retail sales.
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.
Maybe? I can tell you that Amazon has huge pricing power on bandwidth. You need to have serious sales chops to change anything like what Amazon does, and then you probably are left with a high touch customer.
I do think that this might change next downturn, but this is yet to be seen.
The straight-faced comparisons to the inflation-adjusted valuations of the Mississippi Company and the South Sea Company made me chuckle: both of those companies ended up in calamitous crashes!
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
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[ 2.2 ms ] story [ 181 ms ] thread$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.
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.
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.
https://www.eia.gov/tools/faqs/faq.php?id=427&t=3
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?)
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)
When will the American hipsters craving hoppy IPAs ever think about the economist's productivity statistics?!
They even point out that the East India Trading company, when adjusted for inflation, was a 7.9T company.
Just be careful on these rapid upticks, and be prepared to bail out if you went in too aggressively.
Or atleast that's what my current thought is regarding this topic.
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.
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
https://www.marketwatch.com/investing/stock/tsla
https://stocktwits.com/symbol/TSLA
https://www.nasdaq.com/symbol/tsla/pe-ratio
TSLA had price per losses ratio something like -30 last year.
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.
Why not? Why such a pessimistic assumption of decline in ability to quickly create value for the rest of time?
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
https://www.youtube.com/watch?v=k1kndKWJKB8