Bear, you are on the right track but you are invoking the wrong statistic. It’s not the Law of Large Numbers but the Sigmoid Growth Curve or “S” Curve for short.
The Law of Large Numbers is what rules casinos and insurance. You can’t tell the next number in roulette but play long enough (have a long series of numbers) and the outcome will match the expected probability quite closely. You don’t know when someone is going to die but insure a million people (a large number) and actuaries can predict the mortality rate quite accurately save for force majeure which is why things like war are excluded from basic coverage.
The growth rate of many things in nature as well as the price of stock of growth companies tends to follow the “S” curve, so called because it looks like the letter “S”.
https://www.google.com/search?q=Sigmoid+Growth+Curve&num…
The growth does not apply to a company but to a product and not to just one brand but the the whole product like (i.e. smartphones). A company like Apple can have a series of “S” curves in its price: iPad, iPod, iPhone. Disk companies have “S” curves for the various sizes: 5.25, 3.5, 2.5, 1.8, etc. 3M might have an “S” curve for various of its sticky products: scotch tape, making tape, EKG electrodes, stickies, etc.
Generally speaking, the life of a technology (cars, computers, smart phones) can be divided into three equal parts, from inception to 15% market penetrations, fast growth from 15 to 85% market penetrations and another third after that. 15% and 85% mark the inflection points, the curve in the hockey stick and the top of the “S”. Of course these numbers are just guidelines, approximations.
When you invoke the Law of Large Numbers you don’t really know what “large” is but market penetration is more manageable and you don’t have to be precise, just aim for the center of the “S”, say from 30% to 70%. Don’t bet on long shots, wait for the market to tell you it likes the technology. Don’t overstay your growth welcome, by the end the stock becomes a “value play” as it often remains a cash cow for a long time but stock price growth dwindles as the P/E ratio is compressed as in Apple. A P/E of 10 means that Mr. Market does not see any additional growth in the stock.
I don’t like FaceBook and I think Apple is past its prime so I won’t comment on them. Amazon is quite amazing.
The first difficulty with Amazon is defining what it is. It’s a retailer, it makes gadgets, it’s a market place, it’s cloud computing. I believe that things like the robot company and freight services can be ignored for this analysis but they could become meaningful in time. I’m going to concentrate on retail and cloud with a special mention of Amazon Prime.
Amazon Internet Retail
I’ve been salesman for most of my professional life. Not a particularly brilliant one but I did learn a lot about the trade. It’s all in the method. Amazon is to the Internet what Sears Roebuck was to railroads. You might want to read a few pages of how Sears got started. There was a niche for the taking and Sears took it. Take note of the furious expansion of Sears Roebuck during its first two decades and it was just getting started. Amazon is 22 years old.
http://www.searsarchives.com/history/history1886.htm
The fastest growing segment of all the retailers I have followed (except Ross Stores that does not do online at all for reasons of their own) is online sales. But they only sell their own stuff. Amazon started reselling books and with its market place it grew to sell everything. And Amazon is growing vigorously outside the USA. It could well become the first truly global retailer. We don’t have Amazon in Venezuela but I order from the US and get it delivered by currier. Amazon could experience a bunch of “S” curves as it carves out niches in country after country (now going after China and India) and as it adds more merchants to its marketplace. Asking what is too big is the wrong question. The right question is market share by niche. When the world’s internet markets are 75% to 80% saturated it’s time to abandon AMZN.
Amazon Cloud Computing (AWS)
I can’t claim any familiarity with AWS but it seems to me that the notable difference with more traditional servers is flexibility and price. In traditional data centers you buy or rent a fixed amount of hardware, storage, and bandwidth in one of several modalities from co-location to virtual servers to shared servers and you pay a fixed price. When you exceed your allotment service stops. Typically you buy twice as much memory that you typically need. With email you have to beware of multi-mega incoming junk that gums up the works. With AWS you pay for what you use and increasing or decreasing resources is very easy.
I believe AWS was born to take advantage of the extra resources that Amazon had at their disposal. This is typical Amazon, when they needed robots for the warehouses they didn’t just buy them, they bought the company that makes them. Now they are buying (or leasing) trailers and freight airplanes for delivery.
By the looks of it, AWS is giving traditional hosting a run for the money and it’s an expanding world wide market that is nowhere near saturation.
Amazon Prime
The appeal of Amazon Prime for Amazon is that it creates a float that boosts cash flow. Float is money prepaid by customers for future delivery of products or services. Until the products or services is delivered, Amazon gets free use of the money. Float is one of the (not so) secret weapons of Warren Buffett with the insurance business being the prime supplier of float.
Back to Sears
Who would have imagined during the first two decades of the 20th century that Sears would be one of the anchors of suburban shopping malls? The Interstate Highway System that promoted suburbs was not built until Eisenhower came along. Believing that Amazon is already up against unsurmountable limits is a terrific misunderstanding of the business. I’m not saying that there are no risks. I’m saying that Amazon is nowhere near being too big. Careful monitoring of market penetration is key to investing in Amazon.
Denny Schlesinger