Tech company valuations

[shalab]

The valuation of AAPL + GOOG is close to the total GDP of Canada

The valuation of AAPL + GOOG + FB + AMZN is close to the total GDP of India

The valuation of AAPL + GOOG + FB + AMZN + MSFT is greater than the GDP of U.K and is 3-4 hundred billion behind Germany's GDP

 

Do you think the market is fairly valuing or over valuing these companies at these levels?

 

 

[abyli]

The valuation of AAPL + GOOG is close to the total GDP of Canada

The valuation of AAPL + GOOG + FB + AMZN is close to the total GDP of India

The valuation of AAPL + GOOG + FB + AMZN + MSFT is greater than the GDP of U.K and is 3-4 hundred billion behind Germany's GDP

 

Do you think the market is fairly valuing or over valuing these companies at these levels?

 

I would say undervalued. :-)

[DTEJD1997]

The valuation of AAPL + GOOG is close to the total GDP of Canada

The valuation of AAPL + GOOG + FB + AMZN is close to the total GDP of India

The valuation of AAPL + GOOG + FB + AMZN + MSFT is greater than the GDP of U.K and is 3-4 hundred billion behind Germany's GDP

 

Do you think the market is fairly valuing or over valuing these companies at these levels?

 

I would say undervalued. :-)

 

One of these is not like the others....

 

 

[Guest longinvestor]

The valuation of AAPL + GOOG is close to the total GDP of Canada

The valuation of AAPL + GOOG + FB + AMZN is close to the total GDP of India

The valuation of AAPL + GOOG + FB + AMZN + MSFT is greater than the GDP of U.K and is 3-4 hundred billion behind Germany's GDP

 

Do you think the market is fairly valuing or over valuing these companies at these levels?

 

Been wondering about the same topic myself. It is eerily similar to dotcom times. I started a thread on productivity in the Berkshire section and am wondering if these are the names that enable or somehow foster the promised land of ueber-productivity? If  so, which of these names and how much of the 2% we are getting currently is somehow attributable to these names? If it is not productivity what else do they deliver? Competitiveness? Unending pleasure of socializing?

 

On a personal note, I use most products of these companies during the day but find myself still returning to my regular work of 1/3 to 1/2 of a day doing about the same kind of things I used to do 20 years ago. As to the nuisance of ads when I do use these names, I seldom buy anything that they are marketing to me. Less than 2% of my annual household spending is directly on or through these products. If I've saved on time of brick-and-mortar shopping, it is promptly spent (wasted?) on useless browsing on a screen. At work, I myself have spent (wasted) countless man-hours pitching powerpoint & such over the past 20 years. See that is what happens all around me. We used a overhead projector before and had to be succinct and careful not to waste the transparencies. Somehow less was more then, now it appears to me that more is less. I get about 100 emails a day, 100's of text messages, how they translate to living better or longer lives, I do not know.

 

What is it? 

[abyli]

I'd like to hear: "why you think those companies are overvalued?"

[SlowAppreciation]

The valuation of AAPL + GOOG is close to the total GDP of Canada

The valuation of AAPL + GOOG + FB + AMZN is close to the total GDP of India

The valuation of AAPL + GOOG + FB + AMZN + MSFT is greater than the GDP of U.K and is 3-4 hundred billion behind Germany's GDP

 

Do you think the market is fairly valuing or over valuing these companies at these levels?

 

Been wondering about the same topic myself. It is eerily similar to dotcom times. I started a thread on productivity in the Berkshire section and am wondering if these are the names that enable or somehow foster the promised land of ueber-productivity? If  so, which of these names and how much of the 2% we are getting currently is somehow attributable to these names? If it is not productivity what else do they deliver? Competitiveness? Unending pleasure of socializing?

 

 

When framed in the context of a country's GDP, it does feel weird. My gut reaction is "surely the valuation must be too high". But also remember that these companies are not restricted to geographic borders so their reach is enormous, and they do provide tremendous benefits to society. Just think back to what life was like 40 years ago:

 

• If I wanted all the world's information it would cost me $1000 for an encyclopedia
  
• If I need to buy something I'd have to spend hours shopping/comparing pricing, hope that a store had something in stock, and then worry about getting to/from the store (whose prices may be a total ripoff)
  
• If I wanted a TV, Radio, Computer, Record Player, VCR, and Camera, that would set me back at least $10,000
  
• If I wanted to call someone long-distance—even 10 miles away in a neighboring state—I would have to shell out $.50/minute
  
• If I needed to do something at work I'd have to get a typewriter, physically deliver something to someone, wait for them to physically deliver something back to me, etc.
  

 

Today, I can do work in a fraction of the time on a device—which doubles as a TV, radio, computer, music player, video player, and camera—I can bring everywhere in my pocket. From this same device I can find the cheapest prices on every product in the world and have it sent directly to me. I can access the entirety of human knowledge with the push of a button, and instantly communicate with anyone in the world at any time. All this costs me $100/month, which is probably 99% cheaper than the same functionality would have been in 1977. And everyone in the world has the same access.

 

So these companies have provided huge efficiency and productivity gains at a very affordable rate. I don't know exactly what that's worth. But I don't think current levels are all that unjustified. $2.5T for 5 companies which make ~$.12T/yr in profit (20 P/E), have plenty of room to grow, require virtually no capital to operate, and provide immeasurable benefits to society?

 

Maybe not so unreasonable after all...

[Uccmal]

Berkshire's Market Cap is 400 B. 

 

So what. 

 

Comparing market Cap to Income (GDP) is simply wrong. 

 

Not to say the collective tech. companies are not over valued.  They certainly are based on cash flows and the time it takes to get your cash back out. 

 

It really depends on how long their runways are.  Canada or Germany's runways are likely far longer than any tech.. companies. 

[Guest longinvestor]

There is an implicit assumption that the edge won't be taken away from them.

 

My order for the likeliest to be taken away from,

 

1. Facebook

2. Google

3. Amazon

4. Microsoft

5. Apple

 

Risks I can think of,

1,2: ad revenue risks: Consumer revulsion to privacy invasion and massive security breaches; Network providers placing ($$ and access)hurdles to free flow of data; Advertisers figure out that such ads not effective. 

3: emergent competitor; shipping & logistics cost; unfavorable taxation from local government.

4: emergent competitor; not keeping up with mobile device revolution.

5: Asian competitor; pricing power erosion.

 

 

 

 

[Uccmal]

There is an implicit assumption that the edge won't be taken away from them.

 

My order for the likeliest to be taken away from,

 

1. Facebook

2. Google

3. Amazon

4. Microsoft

5. Apple

 

Risks I can think of,

1,2: ad revenue risks: Consumer revulsion to privacy invasion and massive security breaches; Network providers placing ($$ and access)hurdles to free flow of data; Advertisers figure out that such ads not effective. 

3: emergent competitor; shipping & logistics cost; unfavorable taxation from local government.

4: emergent competitor; not keeping up with mobile device revolution.

5: Asian competitor; pricing power erosion.

 

Well articulated.  1 company from the original DJIA is still around and its in a completely different business than it started as.  Things change quickly. 

30 years ago, MSFT - tiny startup: Apple- same

20 years ago:  Apple - Tiny, Google in the works; MSFT a juggernaut with an unassailable monopoly: Amazon a tiny startup

10 years ago:  Iphone; Google goes public; MSFT losing its monopoly slowly; Amazon growing; No FB yet.

 

[Liberty]

Comparing market Cap to Income (GDP) is simply wrong. 

 

Exactly. Hard to draw useful conclusions from a faulty premise...

[clutch]

There is an implicit assumption that the edge won't be taken away from them.

 

My order for the likeliest to be taken away from,

 

1. Facebook

2. Google

3. Amazon

4. Microsoft

5. Apple

 

Risks I can think of,

1,2: ad revenue risks: Consumer revulsion to privacy invasion and massive security breaches; Network providers placing ($$ and access)hurdles to free flow of data; Advertisers figure out that such ads not effective. 

3: emergent competitor; shipping & logistics cost; unfavorable taxation from local government.

4: emergent competitor; not keeping up with mobile device revolution.

5: Asian competitor; pricing power erosion.

 

Well articulated.  1 company from the original DJIA is still around and its in a completely different business than it started as.  Things change quickly. 

30 years ago, MSFT - tiny startup: Apple- same

20 years ago:  Apple - Tiny, Google in the works; MSFT a juggernaut with an unassailable monopoly: Amazon a tiny startup

10 years ago:  Iphone; Google goes public; MSFT losing its monopoly slowly; Amazon growing; No FB yet.

 

So things changing over a 10 year period is considered quick now?  :o

 

Think about that time frame in the context of typical cyclical businesses / commodities...

[clutch]

I wonder if people's perception on these valuations would change if they instead read "service provider valuations"?

[shalab]

The reason GDP and stock valuations matter:

 

1. There is only so much money available to buy these stocks

2. There is a limited supply of stocks any given day - so short term sentiments drive up value

3. Not sure how much money is borrowed on these names - it is the PE expansion that has driven many of these names in the past two years and especially this year.  e.g:, MSFT net income has been the same in the past four years but just mentioning cloud growth and non GAAP numbers have driven its valuation up. This is also reflected in the pay of the CFO who has orchestrated this message.

4. Buffett himself quoted this metric in the past and gurufocus looks at it:

As of today, the Total Market Index is at $ 25105.8 billion, which is about 132.1% of the last reported GDP. The US stock market is positioned for an average annualized return of -1%, estimated from the historical valuations of the stock market. This includes the returns from the dividends, currently yielding at 1.89%.

As pointed by Warren Buffett, the percentage of total market cap (TMC) relative to the US GNP is “probably the best single measure of where valuations stand at any given moment.”

 

 

Berkshire's Market Cap is 400 B. 

 

So what. 

 

Comparing market Cap to Income (GDP) is simply wrong. 

 

Not to say the collective tech. companies are not over valued.  They certainly are based on cash flows and the time it takes to get your cash back out. 

 

It really depends on how long their runways are.  Canada or Germany's runways are likely far longer than any tech.. companies.

[no_free_lunch]

I think the valuations are on the high end of reasonable for most of these companies but they are still reasonable  Let's just take one example though, FB.  It has a PE around 35x but is growing 40%+ per year.  Certainly that growth rate can't go forever but we don't really know where it levels off.  Given the growth rate it is really not that expensive.  I would agree that there is not a big margin of safety so I won't invest but you don't have the information to say that it is over-valued for FB or GOOGL, in my  opinion.  I think MSFT is a bit over-valued but really not that terribly much.  AMZN is just really hard to analyze so who knows.  AAPL is not over-valued at all on conventional metrics but then we have no idea how sustainable the profits are, so I would avoid it.

 

[DTEJD1997]

I think the valuations are on the high end of reasonable for most of these companies but they are still reasonable  Let's just take one example though, FB.  It has a PE around 35x but is growing 40%+ per year.  Certainly that growth rate can't go forever but we don't really know where it levels off.  Given the growth rate it is really not that expensive.  I would agree that there is not a big margin of safety so I won't invest but you don't have the information to say that it is over-valued for FB or GOOGL, in my  opinion.  I think MSFT is a bit over-valued but really not that terribly much.  AMZN is just really hard to analyze so who knows.  AAPL is not over-valued at all on conventional metrics but then we have no idea how sustainable the profits are, so I would avoid it.

I would agree with you on both FB & GOOG.  Probably MSFT also.  HOWEVER, I think that AAPL is the lowest priced/lowest valuation of any of these companies.  AAPL has a better brand name than FB, they make substantial profit, have TONS of cash...have a lock on a lot of hardware niches, and so on.

 

The one stock I don't think should be in this group is AMZN.  AMZN is an interesting company, but they make so little profit.  They are vulnerable to the good graces of the capital market.  Why is AMZN the one of the few companies to get a pass and be able to operate without a meaningful profit?  Why shouldn't EVERY business be run like AMZN?

 

If AMZN is a decent bargain at $1,000/share, where does it NOT become a decent deal?  $1,500?, $2,000,  $3,000? more?

 

In my personal business, I could EXPLODE sales if I wanted to make a small or zero profit.  I bet I could probably expand sales 5X or even more...but at the end of the day, I've got bills to pay and wealth to accumulate through retained profits...

[rb]

If AMZN is a decent bargain at $1,000/share, where does it NOT become a decent deal?  $1,500?, $2,000,  $3,000? more?

 

In my personal business, I could EXPLODE sales if I wanted to make a small or zero profit.  I bet I could probably expand sales 5X or even more...but at the end of the day, I've got bills to pay and wealth to accumulate through retained profits...

Correct. It's easy to beat your competitors on price and grow if you don't need to make a profit. For now Amazon is not a business. It's a non-profit.

[Uccmal]

The reason GDP and stock valuations matter:

 

1. There is only so much money available to buy these stocks

2. There is a limited supply of stocks any given day - so short term sentiments drive up value

3. Not sure how much money is borrowed on these names - it is the PE expansion that has driven many of these names in the past two years and especially this year.  e.g:, MSFT net income has been the same in the past four years but just mentioning cloud growth and non GAAP numbers have driven its valuation up. This is also reflected in the pay of the CFO who has orchestrated this message.

4. Buffett himself quoted this metric in the past and gurufocus looks at it:

As of today, the Total Market Index is at $ 25105.8 billion, which is about 132.1% of the last reported GDP. The US stock market is positioned for an average annualized return of -1%, estimated from the historical valuations of the stock market. This includes the returns from the dividends, currently yielding at 1.89%.

As pointed by Warren Buffett, the percentage of total market cap (TMC) relative to the US GNP is “probably the best single measure of where valuations stand at any given moment.”

 

 

Berkshire's Market Cap is 400 B. 

 

So what. 

 

Comparing market Cap to Income (GDP) is simply wrong. 

 

Not to say the collective tech. companies are not over valued.  They certainly are based on cash flows and the time it takes to get your cash back out. 

 

It really depends on how long their runways are.  Canada or Germany's runways are likely far longer than any tech.. companies.

 

Shalab, This is not the context in which you originally presented your numbers. 

[Liberty]

If AMZN is a decent bargain at $1,000/share, where does it NOT become a decent deal?  $1,500?, $2,000,  $3,000? more?

 

In my personal business, I could EXPLODE sales if I wanted to make a small or zero profit.  I bet I could probably expand sales 5X or even more...but at the end of the day, I've got bills to pay and wealth to accumulate through retained profits...

Correct. It's easy to beat your competitors on price and grow if you don't need to make a profit. For now Amazon is not a business. It's a non-profit.

 

You're looking at it wrong.

[rb]

If AMZN is a decent bargain at $1,000/share, where does it NOT become a decent deal?  $1,500?, $2,000,  $3,000? more?

 

In my personal business, I could EXPLODE sales if I wanted to make a small or zero profit.  I bet I could probably expand sales 5X or even more...but at the end of the day, I've got bills to pay and wealth to accumulate through retained profits...

Correct. It's easy to beat your competitors on price and grow if you don't need to make a profit. For now Amazon is not a business. It's a non-profit.

 

You're looking at it wrong.

For sure I am. After all a company is not supposed to make money.

 

[shalab]

Bezos has brilliantly played the tax code and wall street to become a behemoth in retail and cloud. There have several other businesses inside AMZN which aren't as big but generate cash. Amazon will play the long game of attrition. Not very many will be left standing when this game is over.

 

While valuing Amazon is a difficult task, it is also not clear Amazon will do as well if free shipping benefit is removed from prime.

 

Money lost by AMZN in the past three years in shipping in billions of dollars, the last year being 2016.

 

(4,223)  (5,019) (7,191)

 

Let us say it reaches WMT scale in retail, then it would be worth $200B. AWS could be worth another $150-200B. Let us say this is worth 200B. Total value is at 400B.

 

If one looks at free cash flow - lease payments, it was 5.7B in 2016. (20% increase from 2015). Let us say this will grow by 30% a year for next four years - putting a multiple of 30 in 2020 for this cash flow, one gets a valuation of 490B.

 

So, not a whole lot of upside from these price levels.

 

MSFT case is interesting for two reasons - the CFO didnt have a prominent role during Ballmer/Gates years. Secondly, the emphasis on Non-GAAP earnings and creating a narrative to wall street.

 

This also coincides with valueact sitting in the board - the CFO is now the second highest paid employee at MSFT. During Gates years, it was the engineering leaders, during Ballmer years, it was sales, legal and now it is finance and legal. It shows the priorities of the company in general.

 

Now, financial engineering (some of these tactics were also used at Valeant - e.g:, the use of Non GAAP earnings, questionable cloud growth numbers etc.) and higher stock price are priority. I am surprised reputable publications like valueline take these Non GAAP earnings and apply as actual earnings. (they did for Valeant and now MSFT). The net earnings have declined from 27B (pre-tax) five years back to around 22B (pre-tax) now. However, the stock price has more than doubled thanks to this narrative.

 

 

If AMZN is a decent bargain at $1,000/share, where does it NOT become a decent deal?  $1,500?, $2,000,  $3,000? more?

 

In my personal business, I could EXPLODE sales if I wanted to make a small or zero profit.  I bet I could probably expand sales 5X or even more...but at the end of the day, I've got bills to pay and wealth to accumulate through retained profits...

Correct. It's easy to beat your competitors on price and grow if you don't need to make a profit. For now Amazon is not a business. It's a non-profit.

 

You're looking at it wrong.

For sure I am. After all a company is not supposed to make money.

[rb]

What happened at MSFT was some erosion in Windows (which was expected) but also they were very aggressive in moving to cloud delivery from on prem. The thing is that the cloud stuff is less profitable but a hell of a lot more sticky. Maybe the decreased profitability is just the carrot for the switch and pricing will move once they have their clients locked in. Who knows? What's for sure is that Wall St. really likes the model.

 

Moreover, the Valeant comparison doesn't really apply. Yeah, MSFT is like VRX if you ignore their cash position, lack of meaningful debt, river of actual cash flowing in, lack of dependence on bullshit price hikes to stay alive, and the fact that MSFT actually has its own products that people are buying. Otherwise they're the same.

 

Full disclosure, I own MSFT. I loaded up around $23-$24 in 2011-2012 and it became my largest position @20%. Disposed of some along the way up. But I'm generally a happy camper with the company and the stock. I think it's fully valued at these levels.

[Liberty]

If AMZN is a decent bargain at $1,000/share, where does it NOT become a decent deal?  $1,500?, $2,000,  $3,000? more?

 

In my personal business, I could EXPLODE sales if I wanted to make a small or zero profit.  I bet I could probably expand sales 5X or even more...but at the end of the day, I've got bills to pay and wealth to accumulate through retained profits...

Correct. It's easy to beat your competitors on price and grow if you don't need to make a profit. For now Amazon is not a business. It's a non-profit.

 

You're looking at it wrong.

For sure I am. After all a company is not supposed to make money.

 

A company is supposed to create value. Reinvesting all your earnings internally is one way to create value. TCI didn't have any earnings either.

 

Update: A bit more here http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/amzn-amazon-com-inc/msg300226/#msg300226

[SlowAppreciation]

If AMZN is a decent bargain at $1,000/share, where does it NOT become a decent deal?  $1,500?, $2,000,  $3,000? more?

 

In my personal business, I could EXPLODE sales if I wanted to make a small or zero profit.  I bet I could probably expand sales 5X or even more...but at the end of the day, I've got bills to pay and wealth to accumulate through retained profits...

Correct. It's easy to beat your competitors on price and grow if you don't need to make a profit. For now Amazon is not a business. It's a non-profit.

 

You're looking at it wrong.

For sure I am. After all a company is not supposed to make money.

 

A company is supposed to create value. Reinvesting all your earnings internally is one way to create value. TCI didn't have any earnings either.

 

Since reading Cable Cowboy, I see Amazon in a whole new light...

[clutch]

If AMZN is a decent bargain at $1,000/share, where does it NOT become a decent deal?  $1,500?, $2,000,  $3,000? more?

 

In my personal business, I could EXPLODE sales if I wanted to make a small or zero profit.  I bet I could probably expand sales 5X or even more...but at the end of the day, I've got bills to pay and wealth to accumulate through retained profits...

Correct. It's easy to beat your competitors on price and grow if you don't need to make a profit. For now Amazon is not a business. It's a non-profit.

 

You're looking at it wrong.

For sure I am. After all a company is not supposed to make money.

 

A company is supposed to create value. Reinvesting all your earnings internally is one way to create value. TCI didn't have any earnings either.

 

A buddy and personal car mechanic of mine opened his own shop a couple of years ago. It was interesting to hear from him that his goal is to take as little salary as possible to support himself, and to reinvest all the money he makes on growing his shop. He wasn't trying to make profit at this point. Now he never had any business education nor heard about how companies like Amazon operate, but he just understood that for his business to grow and achieve his goal, that's what he had to do.

 

So when I hear a story like this, I completely understand giving up profit to grow the business value. In fact, it could be the default startegy for many entrepreneurs. Not sure why one cannot see this from what Bezos is doing, especially when he continuously preach that that's what he is doing.

[Liberty]

So when I hear a story like this, I completely understand giving up profit to grow the business value. In fact, it could be the default startegy for many entrepreneurs. Not sure why one cannot see this from what Bezos is doing, especially when he continuously preach that that's what he is doing.

 

Almost everyone is short-term oriented. This only works for long-term oriented people, and for public companies, you have to spend a long time educating your shareholder base about what you're doing and they have to trust that you really mean it and can pull it off, otherwise they won't give you the latitude (also helps if you are a founder-majority owner)...