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Definitely. I'm not claiming it's black and white or either/or, to be clear. But, what are the characteristics investors should look at for "tech company P:E"?
by md_ 4y ago
Definitely. I'm not claiming it's black and white or either/or, to be clear.
But, what are the characteristics investors should look at for "tech company P:E"? Presumably a non-linear profit curve driven by low unit costs, linear or increasing revenue per unit, and strong network effects. IOW, if you're building the next Microsoft, each unit of Windows sold costs you nothing, makes you the same revenue (and thus more profit) than the previous unit, and increases the appeal of Windows because "everyone is using it."
Retail businesses are just totally the opposite of that.
The network effects are limited. (I guess for marketplaces this isn't totally the case: if everyone is buying on Amazon, then more resellers want to become Amazon resellers. But then, for "platforms" like Uber, it seems the network effects are weaker than we might think; drivers and users both find it easy to drive for/hail on Uber, Lyft, etc, side-by-side.)
The unit costs are fixed.
As the retailer gets bigger, their growth naturally trends closer to overall economic growth. (If you sell software, and the software makes workers 10x more productive, you can expect to get a cut of that 10x in productivity. If you sell milk, your market is going to grow at the rate at which demand for milk grows.)
The real malefactors, in my mind, are people like Warby Parker, Away, Casper, etc--direct to consumer is fine and well and probably lowers costs a bit, but it's fundamentally similar to ordering from the Sears Catalog in the 19th century. But by some bizarre combination of hype and, I know I keep saying it, clever CSS, these jokers have convinced investors they're somehow different.
See https://www.economist.com/business/2021/09/09/direct-to-consumer-retailers-try-to-bring-pizzazz-to-dull-goods https://www.economist.com/business/2021/09/09/direct-to-cons..., https://www.ft.com/content/616421f0-6946-485a-aca4-e9a2a522af25 https://www.ft.com/content/616421f0-6946-485a-aca4-e9a2a522a..., etc.
- Scaevolus 4y agoAre retailer unit costs fixed? The larger they become, the better contracts they can negotiate with suppliers, the cheaper they can make their logistics and delivery network with economies of scale, and the less they have to spend on advertising.
- md_ 4y agoI guess that's true. FWIW, because this chart only goes back ten years, it's not like there's some obvious trend with WalMart (as an example) where as revenue increased, margins went up: https://www.macrotrends.net/stocks/charts/WMT/walmart/profit-margins https://www.macrotrends.net/stocks/charts/WMT/walmart/profit.... In fact, as revenue went up, margins went down-ish. The comparison I would still draw is to pure software businesses where they: a) Pay almost nothing per unit b) Increase in value the more users they have (due to more software for the platform, for example, and greater compatibility) c) Directly lead to significant productivity/efficiency gains in their customers, which they can then claim a piece of If a retailer becomes a near-monopolist, short of monopoly pricing, they will generate margins that tend towards the average for retail (which are low!), and they will grow at close to the rate of economic growth. In comparison, if a software company becomes a near-monopolist, even without monopoly pricing, their margins will increase and their utility will increase.
- Scaevolus 4y agoWalmart hit diminishing returns on scale efficiencies a long time before 2012-- their revenue has basically been tracking inflation for the last decade.