What can we learn from history ?

Hi - 

Many of the companies discussed here appear expensive.
Valuation guys have an understandable view as "revenues growth but no profits", "growth priced in" or "priced for perfection". 

With hindsight we can peek into companies like AMZN and GOOG, 2 gems of last 20 years and see if we can learn something. (yeah, I know that these are rare success stories)
  
1. Fast growers are always controversial
2. Their valuation is not easy and clear
3. They always appear expensive with tools like PE
4. Price is volatile

<b>One common characteristic that is shared by these compounders is that they were winning in the market irrespective of their valuation and volatality. 
They were dominating, growing their revenues faster than their competition, increasing market share and their intrinsic value was growing fast.</b> 
Sometimes valuation was rational and at other times it was irrational. 
__Don't over index on valuation *as long as it is in a reasonable zone*.__ 
*Example: UPST at $400 is unreasonable. UPST at $100 or $150 will not matter 10 years from now.* 

Here is a glimpse into history of how the market cap, revenues, fcf and net income of these fast growers. 
It is also worth pointing that you don't need to be IPO or get in at the bottom early to participate in success. 
You can wait and buy when you have conviction. <b>When you find a fast grower and have conviction, swing. 
The opportunity cost of missing is too great and will not show up in any accounting. </b>

AMZN	Year	MCap	Revenue	FCF	Income	Returns
---------------------------------------------------------
	1997	600m			5m	*ignoring this
	2002	4B	3.1B	135M	-149M	*baseline
	2007	33B	15B	1.18b	476M	450%
	2012	112B	61B	395M	-39M	1850%
	2017	469B	177B	6.4B	3.2B	8200%
	2022	1.48T	470B	-14B	33B	36000%
						
GOOG	Year	MCap	Revenue	FCF	Income  Returns
---------------------------------------------------------	
	2004	17B	3.18B	658M	399M	*baseline
	2007	140B	10B	1.6B	3B	850%
	2012	244B	46B	12B	14B	1360%
	2017	650B	110B	31B	34B	4412%
	2022	1.7T	257B	67B	76B	11310%

*These gems are rare and companies discussed here might never become AMZN or GOOG. The point is that they were always expensive and controversial.*
14 Likes

Re-post of message from dividends20, reformatted for readability.

Hi -

Many of the companies discussed here appear expensive.
Valuation guys have an understandable view as “revenues growth but no profits”, “growth priced in” or “priced for perfection”.

With hindsight we can peek into companies like AMZN and GOOG, 2 gems of last 20 years and see if we can learn something. (yeah, I know that these are rare success stories)

  1. Fast growers are always controversial
  2. Their valuation is not easy and clear
  3. They always appear expensive with tools like PE
  4. Price is volatile

One common characteristic that is shared by these compounders is that they were winning in the market irrespective of their valuation and volatality.
They were dominating, growing their revenues faster than their competition, increasing market share and their intrinsic value was growing fast.
Sometimes valuation was rational and at other times it was irrational.
Don’t over index on valuation as long as it is in a reasonable zone.
Example: UPST at $400 is unreasonable. UPST at $100 or $150 will not matter 10 years from now.

Here is a glimpse into history of how the market cap, revenues, fcf and net income of these fast growers.
It is also worth pointing that you don’t need to be IPO or get in at the bottom early to participate in success.
You can wait and buy when you have conviction. When you find a fast grower and have conviction, swing.
The opportunity cost of missing is too great and will not show up in any accounting.


AMZN	Year	MCap	Revenue	FCF	Income	Returns
---------------------------------------------------------
	1997	600m			5m	*ignoring this
	2002	4B	3.1B	135M	-149M	*baseline
	2007	33B	15B	1.18b	476M	450%
	2012	112B	61B	395M	-39M	1850%
	2017	469B	177B	6.4B	3.2B	8200%
	2022	1.48T	470B	-14B	33B	36000%
						
GOOG	Year	MCap	Revenue	FCF	Income  Returns
---------------------------------------------------------	
	2004	17B	3.18B	658M	399M	*baseline
	2007	140B	10B	1.6B	3B	850%
	2012	244B	46B	12B	14B	1360%
	2017	650B	110B	31B	34B	4412%
	2022	1.7T	257B	67B	76B	11310%

These gems are rare and companies discussed here might never become AMZN or GOOG. The point is that they were always expensive and controversial.

19 Likes

Google was never really expensive.

Google had the highest valuation 2006 with a P/S ntm of 16.

At IPO it had a valuation of 8 P/S ntm.

And that was an important factor for the ROI for stock holders in GOOGL.

Compare that to Snowflake. Snowflake is a fantastic business (but still no income, compared to google at IPO), but the valuation was simply too high at IPO. Therefore the stock price is more or less sideways since IPO.

Therefore it’s important not to overpay for growth.

18 Likes

Google was never really expensive.

It seems clear now but at the time the knock was that GOOG was “priced for perfection” and “switching costs were 0”.
Today no one remembers the competition: Ask, bing, yellowpages, lycos, altavisa, yahoo etc.

From 2006 to 2011, for 5 years GOOG stock had plateaued and value investors were claiming victory.

Even with TSLA, the shorts and longs, both had a compelling rationale 5 years ago and even today.

Do your own due diligence.

12 Likes

With hindsight we can peek into companies like AMZN and GOOG, 2 gems of last 20 years and see if we can learn something…

1. Fast growers are always controversial
2. Their valuation is not easy and clear
3. They always appear expensive with tools like PE
4. Price is volatile

These gems are rare and companies discussed here might never become AMZN or GOOG. The point is that they were always expensive…

Hi, I generally agree with much of what you said above but GOOG was absolutely not ‘always expensive.’

It had a busted IPO/auction where it definitely traded very cheaply unlike recent IPOs.

In summer 2010, when I bought it the PE ratio was 18x. I bought more in 2012 where it traded down to 16x at midyear again, posted about that here at TMF. [25% CAGR since]

It’s currently at 23x fwd earnings.

The issue with many of the stocks on this board is that they trade at more than 17x Sales, not earnings, some of them 2-3x that valuation. And not a single one of them is as good as Google, doesn’t have their balance sheet, cash flow, brand name, or economic moat. Google is only 16% off it’s alltime high.

Which is not to say they can’t do well and eventually make lots of money.

But it’s a good question to ask yourself why would I own these much more speculative names instead of [rather than in addition to] GOOG or, say, an Adobe Systems at 27x 2022 earnings which also has a near-monopoly and huge economic moat and #1 brand name and is an SaaS stock. [Gross margin 88%, qtly growth 20%]?

Of course everyone is free to buy what they like! But one will also suffer the slings and arrows of outrageous fortune [and regular…uh…fortune] if concentrating on money-losing, hi-tech, hi-risk, momentum-driven, cash-burning stocks. Price will always be more volatile for them than for Google, and many investors don’t actually have the stomach for it when these portfolios go into free-fall.

Hope is not a strategy.

best,
Naj

36 Likes

But it’s a good question to ask yourself why would I own these much more speculative names instead of [rather than in addition to] GOOG.

The answer should be obvious but I will be explicit.

a) What is “speculative” to you may be pretty convincing to someone who understands the company.

b) GOOG market cap is $1.68T. Size. What is the probability of it getting to $3.4T in 5 years ?

c) Many fast growing companies discussed here have compelling stories and high valuations for a reason.

d) Some fast growers are even fcf positive and profitable (UPST, APPS).

e) I invested in AMZN and TSLA when they were young and the shorts always had pretty convincing arguments. Price was always volatile. In the end I had my own due diligence and convictions.

f) Calling someone else’s view a “hope” is condescending.

56 Likes