By Ben Strubel
We live in a world characterized by slow economic growth and the stock market is trading at moderately above average multiples. You can’t just rely on buying stock in a good company and depending on 3% economic growth to drive sales higher. If the overall economic pie is growing slowly you need to find companies that are grabbing a bigger share of the pie. Companies like Amazon (AMZN).
For example, here is a chart showing retail sales excluding gasoline and food. The trend has been growth (above the black line) but growth that is slowing ever so slightly.
This Friday I became a believer in Amazon.
I wasn’t in the past. The company is insanely hard to value. It reinvests a huge portion of its cash flows in growing for the future so it’s devilishly hard to tell exactly how profitable some of its businesses are. Owning the stock is also the mark of the devil as far as many value investors are concerned. A business trading at a high multiple and growing fast, why owning that stock is heresy.
Amazon’s absolutely stellar earnings report, in particular it’s retail strength, in the face of a weak retail environment combined with the fact that the company is entering the pharmacy business and CVS’s panic response by offering to buy Aetna finally put me over the edge.
Rather than bore you with financial models and spreadsheets let’s talk about Amazon in terms of something that’s fun. Will it become the first trillion dollar company? Inflation and economic growth make it inevitable we will eventually have a company worth a trillion dollars and we are close enough to make it worth talking about.
Here are the contenders, the top ten largest companies in America. You can see we are close!
*Sorry, it’ll always be Google to me I’m not participating in renaming it Alphabet.
If we are right about Amazon being a good investment it will be growing fast. But rather then talk about things in terms of share price, or profit margins, or “boring” things it’s much more fun to frame things in how can a company reach a trillion dollars.
Apple is obviously the closest and has perhaps the best shot. But, the company reached a saturation point in its main markets and there is a real risk of consumers keeping phones longer and stretching out the phone upgrade cycle leading to stagnant or falling growth. Of course, if the latest iPhone is a hit it might be able to be the first trillion dollar company.
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