Current Market Conditions And Growth Rates

Hey, The Investor’s Podcast Network Community!

One of my favorite recurring podcast episodes is when Preston and I invite our good friends Tobias Carlisle (a deep value expert) and Hari Ramachandra (an executive in Silicon Valley) on The Investor’s Podcast to talk about their favorite stock picks. You can check out our new episode from this weekend here. Hari is pitching Microsoft while Tobias is pitching the steel industry.

My pick from the mastermind episode is Alibaba and I’ve been giving it more thought since the recording a few weeks ago. As an investor, I’m taught to believe that the bigger the company is, the smaller the potential stock return is (which is typically compensated by better downside protection). Berkshire Hathaway is a good example of this. As it becomes harder and harder to find good picks and operating businesses, the company has understandably not been able to sustain the growth rates it used to have in the past. Another example is Walmart. Walmart can’t continue to increase the number of their new grocery stores because the market is simply saturated.

Now, consider a new generation of companies like Amazon and Alibaba. Despite the enormous size of the company, Amazon grew their revenue at an annual rate of almost 30% over the past three years. Alibaba is close to 50% annually. Both companies show no signs of slowing down anytime soon. How come?

Data for these companies are like horsepowers — more data means bigger advantage. Consider the speed of which Amazon has captured 50% of all online sales. Part of the story is that it’s online. This, of course, logistically provides advantages over Walmart. But data allows for cross-selling in a way that the world has never seen, and technology ensures that companies like Amazon and Alibaba are only getting started.

15%+ annual growth of hundred billion dollar companies might be sustainable for a decade and perhaps longer. Compare that to a company like Bed Bath & Beyond with a market cap of $2B. They should be poised for growth as they enter e-commerce, right? Well, it does not seem to be the case. The size that used to be the advantage of taking market share is now the constraint because it does not allow for the same collection of data.

This is not my way of saying that Amazon and Alibaba will continue to grow at these rates forever and that the best smaller companies can’t outgrow them. Of course not. It’s also not my way of saying that as stock investors, we can expect better returns from Amazon and Alibaba than Bed Bath & Beyond, because growth expectations to some extent are priced in.

My key takeaway is: Size is not the same constraint to growth as it has been in the past, and while used cautiously, a higher growth for data companies like Amazon and Alibaba should be included even in the value investors’ stock assessments that we traditionally use. Being big in today’s data-driven society is a significant competitive advantage, and the true constraint to the returns is just as much overall market size and anti-trust issues as the conventional metrics we use.

If you want to learn about how Preston and I value individual stocks, you can check out our free Intrinsic Value Index or our latest intrinsic value assessments attached in this email.

I hope you have a wonderful rest of the week.

Your Friends,

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P.S. Preston and I are looking to setup a new podcast under the TIP Network, and we’re looking for the right host. We’re looking for a host with expertise in Silicon Valley and another host with experience in real estate investing. If you would like to apply for the position, head over to our TIP Network page for more information.

P.P.S. I’m very excited to interview the founder of NetSuite, Evan Goldberg, who sold his company to Oracle for $9.3B. I’m interviewing him in Las Vegas on April 2, and I would love for you to join. The two-day networking event in April 2 and 3 is completely free to attend. You’ll have to pay for food, drinks, etc., but TIP is not charging anything to facilitate. You can learn more about the event here.