There Be (Data) Giants

Why are the data giants so giant?

Jolly Green Giant near Le Sueur, Minnesota. Public Domain. Source: Wikimedia

In a word, fundamentals. Since 2010, the market size of Facebook, Apple, Amazon, Microsoft, and Google has tripled, while their revenues have more than tripled, and their earnings have more than doubled. This has happened while the companies have amassed a giant cash hoard of over half a trillion dollars. By some measures, the valuation of the data giants has gotten cheaper, not more expensive. How can this be? Everyone “knows” the market is expensive now, right?

We need to understand what’s meant by “expensive” in this context. The most common measure of market valuation, the price-earnings ratio, is pretty simple: just take the valuation of a company and divide that by the company’s earnings. You can do this for companies, industries, and the entire market. The price-earnings ratio is where many people start. But it’s not where you should end.

Projected PE Ratio for S&P 500. Source: Bloomberg

There’s lots more to valuation than the price. We need to understand the nature of its business, and how risky the company is. Earnings are good, growth is better, and doing this in a low-risk manner is better still. The data giants are an integral part of how we live today – a massive transformation from a decade ago. Ten years ago, Facebook barely existed, the iPhone had just come out, and cloud computing was just a dream. Now, smartphones, apps, and data management have made mobile computing as necessary to everyday life as Gutenberg’s printing press made books and literacy essential in the 16th century. The transformational power of cheap, mobile computing is critical to the economy. And the data giants have been at the center of this change.

Source: Compustat, Bloomberg

Our economy isn’t just built on hopes and dreams – there have been real revenues flowing to real companies creating real income. It’s good to be careful and “kick the tires” when we invest our money, but we shouldn’t let caution make us cynical.

Because a cynic knows the price of everything and the value of nothing.

Douglas R. Tengdin, CFA

Charter Trust Company

“The Best Trust Company in New England”

By |2018-06-05T07:01:20+00:00June 5th, 2018|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. - Leave a comment if you have any questions—I read them all! - And Follow me on Twitter @GlobalMarketUpd

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