How long can this continue?

“Frequently, you’ll look at a business having fabulous results. And the question is, ‘How long can this continue?’. Well, there’s only one way I know to answer that. And that’s to think about why the results are occurring now – and then to figure out the forces that could cause those results to stop occurring.”
Charlie Munger

Makes me wonder, why are these tech stocks doing well? Two things come to mind. There is a lot of money in the market and these stocks offer businesses a competitive advantage.

What could change? The money could freak out and go… where? Pull out for a while. Sure. But businesses will always seek competitive advantages, so I think we’re in a good place for a while.

But what do I know?

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This was discussed the other day on CNBC’s Half Time Report. They were saying this is a standard reaction to concerns about weaker earnings growth.

Tech is one of the few sectors where growth seems to be continuing so loose change is going there.

But of course everyone wants to know when these stock prices are too high and can their earnings catch up.

These companies are creating wealth.

This will continue until they quit adding more value than other companies.

The Win/Tel alliance continued for 19 years from 1980 to 1999.

We started off with an 8080 chip and 256 k of memory and a 80 character green screen.

By 1999 we had high speed internet and multi media platforms.

How for can this go?

Self driving cars.
Liquid biopsies with personalized medicine.
and other stuff I can’t even think of.

In 1985 I was told we would never have color printer because they took a whole megabyte of ram per page.

Cheers
Qazulight

28 Likes

How for can this go?

Self driving cars.
Liquid biopsies with personalized medicine.
and other stuff I can’t even think of.

Don’t forget a secure connection to anywhere we want to point our device at.

We started off with…

Some of us significantly predate screens of any kind …

The Win/Tel alliance continued for 19 years from 1980 to 1999.

We started off with an 8080 chip and 256 k of memory and a 80 character green screen.

By 1999 we had high speed internet and multi media platforms.
How for can this go?

Self driving cars.
Liquid biopsies with personalized medicine.
and other stuff I can’t even think of.

True. The problem is that in terms of stock valuations, we’re much closer to 1999 than to 1980.

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Lets stop this OT thread here please reply to each other off board.

Thank you.

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I’ve given thought to this. That’s not to say my thinking is correct, only that I’ve spent time thinking on it. Here’s what I came up with.

First, let’s briefly look at why they are experiencing such phenomenal growth. I won’t dwell on it as Saul and others have discussed this at length, but in a nutshell, virtually every company of more than a few employees (and even a lot of one man shops) is becoming dependent upon and embedded with IT components. And it’s just a lot easier to get your infrastructure from a cloud provider than build it on campus. Even if a company already has a large investment in IT infrastructure, there’s enormous pressure to off-load the administration and maintenance of that environment to as a large an extent as possible. Every company has certain functions largely in common. These are the functions that software companies have been addressing for years prior to the ubiquity of the web. ERP, Finance, Inventory, Sales & Marketing, etc. But with the web and the dissolution of corporate boundaries, more and more systems are moving to the cloud. What remains on campus are certain applications that the corporation does not feel comfortable off-loading, or applications that are so specialized that they are not commercially available, or if there is a product, it is very niche focused.

OK, that’s not the whole ballgame, but close enough. On to what might bring things to a close. There are three things that potentially could bring to a close the incredible growth we are seeing with our best cloud focused, subscription based companies, they are: 1) commoditization, 2) disruption and 3) saturation. I am not going to describe those forces. But we can quickly look at the likelihood of them impinging on our investments. I’ll pick Zscaler as an example, I’ll leave it to others to evaluate your own holdings with respect to these risks.

Zscaler is operating in an environment with next to no competition. And based on their scale and what I assume is a healthy patent portfolio the more subscriptions they sell, the stronger their competitive position gets. To be honest, I just don’t view commoditization as a significant risk. Can Zscaler be disrupted? Zscaler is already disrupting the security business for data in motion. Their business case is not just that firewalls and appliances are expensive, and inhibit the user experience, they are becoming increasingly ineffective. Companies with a big investment in security h/w are not going to ditch all that stuff right away, but they will be forced to eventually because, as noted, it just won’t do the job any longer. I’m loath to say Zscaler can’t be disrupted, who knows? But, with 30 years of IT experience (rapidly growing stale since I retired), I’ll go out on a limb and say it’s not very likely. It’s hard to imagine how they could be disrupted, but I guess that’s pretty much always true with any product until the disrupter shows up. That brings us to saturation, which in my estimation is the biggest threat to many of our favorites. There will come a day when these products are so ubiquitous that the demand will taper. True, these companies will continue to have good revenues as the subscription model provides revenue ad infinitum, but the growth will reach the top of the S curve. Unless they develop new, disruptive products they will eventually succumb to saturation. But, we are still in the early innings. I think saturation is years off, maybe as much as 10 years for some of these products. Could be even more for Mongo.

Like I said, I could be wrong, and I welcome other opinions, but that’s how I see it.

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I think the biggest “risk” to them being disrupted? Getting bought by Amazon or Microsoft or Google.

Yeah, I guess you’re right. I left M&A off my list which was an oversight. Make it four possible ends.