7 ms·

Pretty sure the proposed solution is to buy stocks of the U.S. technology giants: Amazon, Apple, Facebook, Microsoft, and Alphabet, the parent company of Google

by pdog 9y ago

Pretty sure the proposed solution is to buy stocks of the U.S. technology giants: Amazon, Apple, Facebook, Microsoft, and Alphabet, the parent company of Google.

adventured 9y ago
The largest market cap companies in a given decade, overwhelmingly tend to be under-performers in the following decade. It's a trend that has repeated decade after decade. Many of these types of companies - AMZN, NFLX, GOOGL, FB - have pulled a massive share of their future returns forward (which is what happened to Microsoft, stagnating its stock for ~15 years). In 2007 the largest companies were: Exxon, GE, Microsoft, PetroChina, Royal Dutch Shell, Citigroup, AT&T, Gazprom, BP, Toyota, Bank of America, China Mobile, HSBC, ICBC, Walmart. All have performed at a mediocre level at best over that time. See: https://www.bloomberg.com/news/articles/2017-09-11/apple-vaults-to-no-1-from-no-70-after-a-decade-of-iphone-sales https://www.bloomberg.com/news/articles/2017-09-11/apple-vau... Is Amazon going to grow into a $2 trillion market cap over the next ten years? No, there is zero possibility of that happening. It'll be very lucky to grow into its existing market cap today, over that ten years. Keep in mind, they have $100 billion in retail sales, generating Walmart style margins on that business; Walmart has ~$450 billion in retail sales, generating ~$15 billion in net income. For that, Walmart gets to trade at half the market cap of Amazon. That's Amazon's future value compression. That multiple erosion won't occur until the market starts to realize the AWS growth machine isn't going to last forever (AWS representing a very large portion of the Amazon stock appreciation the last three years), as that growth curve slows in the next few years, the market will push down on Amazon's present extreme premium. Netflix has a ~200 PE ratio, there is no means for it to ever justify its existing valuation (400 million global subscribers? no chance), much less a far higher one. Their present business model has never proven the ability to produce good margins, content has perpetually sapped their earnings potential and is likely to continue to do so. Facebook and Google will stagnate and grow into their valuations. Google particularly is trading far beyond where it should versus its now modest growth rate. ~37 times earnings, $700 billion market cap, for 10%-15% annual growth over the next five years? No thanks. In the not very distant future, Google will pull a Microsoft and begin paying out a dividend, after this latest stock market bubble ends and their stock returns drift to mediocrity.
- pdog 9y ago
  Investors are willing to accept much lower long-term returns for safe haven assets. If you're going to "just own the damn robots" at any price, you're essentially paying for this sort of insurance.
  - adventured 9y ago
    I agree investors will continue to own these companies in a very big way. They won't continue to maintain much less inflate the premium that presently exists. Microsoft for example has barely grown its income in a decade. On what planet should they have a 28 pe ratio? The stock has tripled (!) in five years on the back of zero income growth. It's massive value destruction just waiting to happen. Shareholders will not just sit, hold and tolerate the inevitable value destruction that is looming, it doesn't work as insurance at all in such a context.
    - frandroid 9y ago
      You forget that Microsoft's stock stagnated for 10 years before that. A 28 PE ratio is the new normal for tech companies. With Ballmer out of the picture, investors are speculating on a brighter future for MS. It's not here yet but they're making lots of smart moves.
      - adventured 9y ago
        > A 28 PE ratio is the new normal for tech companies. It's not the new normal. That's what people say to justify extreme premiums during times in which investors have overly inflated valuations. This is the third bubbly tech era in the last 20 years. That new normal premise has been used frequently in each. I understand why Microsoft has inflated. It doesn't jive with actual results in the post Ballmer era. There isn't even a hint of the kind of growth that could justify such an elevated PE ratio (elevated for a company with no growth for years). Their fast growth areas are struggling to off-set what they're losing in eroding, old business franchises. Net result, they're standing still.
    - 9y ago
s73ver_ 9y ago
But with what money? Most of the people at high risk for displacement aren't exactly rolling in the cash.
beams_of_light 9y ago
An index fund is really the best option.

by pdog 9y ago

Pretty sure the proposed solution is to buy stocks of the U.S. technology giants: Amazon, Apple, Facebook, Microsoft, and Alphabet, the parent company of Google.

adventured 9y ago

The largest market cap companies in a given decade, overwhelmingly tend to be under-performers in the following decade. It's a trend that has repeated decade after decade. Many of these types of companies - AMZN, NFLX, GOOGL, FB - have pulled a massive share of their future returns forward (which is what happened to Microsoft, stagnating its stock for ~15 years). In 2007 the largest companies were: Exxon, GE, Microsoft, PetroChina, Royal Dutch Shell, Citigroup, AT&T, Gazprom, BP, Toyota, Bank of America, China Mobile, HSBC, ICBC, Walmart. All have performed at a mediocre level at best over that time. See: https://www.bloomberg.com/news/articles/2017-09-11/apple-vaults-to-no-1-from-no-70-after-a-decade-of-iphone-sales https://www.bloomberg.com/news/articles/2017-09-11/apple-vau... Is Amazon going to grow into a $2 trillion market cap over the next ten years? No, there is zero possibility of that happening. It'll be very lucky to grow into its existing market cap today, over that ten years. Keep in mind, they have $100 billion in retail sales, generating Walmart style margins on that business; Walmart has ~$450 billion in retail sales, generating ~$15 billion in net income. For that, Walmart gets to trade at half the market cap of Amazon. That's Amazon's future value compression. That multiple erosion won't occur until the market starts to realize the AWS growth machine isn't going to last forever (AWS representing a very large portion of the Amazon stock appreciation the last three years), as that growth curve slows in the next few years, the market will push down on Amazon's present extreme premium. Netflix has a ~200 PE ratio, there is no means for it to ever justify its existing valuation (400 million global subscribers? no chance), much less a far higher one. Their present business model has never proven the ability to produce good margins, content has perpetually sapped their earnings potential and is likely to continue to do so. Facebook and Google will stagnate and grow into their valuations. Google particularly is trading far beyond where it should versus its now modest growth rate. ~37 times earnings, $700 billion market cap, for 10%-15% annual growth over the next five years? No thanks. In the not very distant future, Google will pull a Microsoft and begin paying out a dividend, after this latest stock market bubble ends and their stock returns drift to mediocrity.

pdog 9y ago
Investors are willing to accept much lower long-term returns for safe haven assets. If you're going to "just own the damn robots" at any price, you're essentially paying for this sort of insurance.
- adventured 9y ago
  I agree investors will continue to own these companies in a very big way. They won't continue to maintain much less inflate the premium that presently exists. Microsoft for example has barely grown its income in a decade. On what planet should they have a 28 pe ratio? The stock has tripled (!) in five years on the back of zero income growth. It's massive value destruction just waiting to happen. Shareholders will not just sit, hold and tolerate the inevitable value destruction that is looming, it doesn't work as insurance at all in such a context.
  - frandroid 9y ago
    You forget that Microsoft's stock stagnated for 10 years before that. A 28 PE ratio is the new normal for tech companies. With Ballmer out of the picture, investors are speculating on a brighter future for MS. It's not here yet but they're making lots of smart moves.
    - adventured 9y ago
      > A 28 PE ratio is the new normal for tech companies. It's not the new normal. That's what people say to justify extreme premiums during times in which investors have overly inflated valuations. This is the third bubbly tech era in the last 20 years. That new normal premise has been used frequently in each. I understand why Microsoft has inflated. It doesn't jive with actual results in the post Ballmer era. There isn't even a hint of the kind of growth that could justify such an elevated PE ratio (elevated for a company with no growth for years). Their fast growth areas are struggling to off-set what they're losing in eroding, old business franchises. Net result, they're standing still.
  - 9y ago

s73ver_ 9y ago

But with what money? Most of the people at high risk for displacement aren't exactly rolling in the cash.

beams_of_light 9y ago

An index fund is really the best option.