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”