
The Race to a Trillion - uptown
http://theirrelevantinvestor.com/2018/03/12/the-race-to-a-trillion/
======
nabla9
Again, history does not repeat but it rhymes.

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.

\----

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.

~~~
xkjkls
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.

~~~
nabla9
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.

~~~
xkjkls
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.

~~~
nabla9
>Prime members each paying $100 a year, that's $9 billion in free cash flow.

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.

~~~
xkjkls
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.

~~~
nabla9
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.

------
cs702
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!

* The Mississippi Company: [https://en.wikipedia.org/wiki/Mississippi_Company](https://en.wikipedia.org/wiki/Mississippi_Company)

* The South Sea Company: [https://en.wikipedia.org/wiki/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...](http://www.businessinsider.com/isaac-newton-lost-a-fortune-on-
englands-hottest-stock-2016-1)

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://en.wikipedia.org/wiki/Bubble_Act)

~~~
rurounijones
Extra History has a great series on the South Sea company:

[https://www.youtube.com/watch?v=k1kndKWJKB8](https://www.youtube.com/watch?v=k1kndKWJKB8)

------
thisisit
It is telling that 3 out of 4 of the trillion dollar companies are actually
oil companies. Just goes to show how dependent we are on the fossil fuel.

~~~
uptown
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.

~~~
Robotbeat
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.

~~~
roenxi
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).

~~~
Robotbeat
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.

------
traviswingo
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.

~~~
btilly
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](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.

~~~
xkjkls
> 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.

~~~
btilly
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.

------
anovikov
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.

~~~
adventured
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).

~~~
anovikov
But in a way such comparison makes sense. It shows how much weight a company
or a person had in the world or society of the day.

------
zeveb
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.

~~~
sneak
The [core] CPI very conspicuously omits food and energy costs.

Edit: added [core]

~~~
burlesona
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.

~~~
maxerickson
Yes, rent is included, along with a computed rent for owned homes (they try to
separate the housing value from the property value).

------
cryptoz
> we might never again see a giant stock move like Amazon has over the past 92
> days.

Why not? Why such a pessimistic assumption of decline in ability to quickly
create value _for the rest of time_?

~~~
mempko
global warming

------
jedberg
I thought PetroChina was the first Trillion Dollar Comapny(tm)?

~~~
jperras
If you read the article, it mentions that it would be the first US-based
company to hit the four comma club.

They even point out that the East India Trading company, when adjusted for
inflation, was a 7.9T company.

~~~
garmaine
Which still wouldn't be true because Standard Oil, adjusted for inflation, was
>$1Tn.

~~~
larkeith
Standard Oil is mentioned in the article.

~~~
garmaine
Yes, defeating the claim of the article.

------
dagaci
Interestingly amzn, goog seem to be doing this on much lower volume than the
competition

[https://finance.yahoo.com/quotes/AAPL,MSFT,ORCL,GOOG,INTC,QC...](https://finance.yahoo.com/quotes/AAPL,MSFT,ORCL,GOOG,INTC,QCOM,AMZN,CSCO/view/v1)

~~~
petra
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 ?

~~~
xkjkls
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.

------
paulpauper
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.

~~~
lostlogin
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.

~~~
paulpauper
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.

