What Are YOU Worth to FAANG?
As investors, we are trained to think about companies in terms of valuation. How much revenue do they collect? How fast is that revenue growing? How are profit margins, and is there room for good management to increase the number of pennies it banks on each dollar taken in?
Really, these are fairly simple questions to answer. And that's why we all have a pretty good handle on price-to-earnings (P/E) ratios. Since 2012, Apple's valuation has oscillated between 10 and 20 times its earnings. (That changed only recently, in December 2019, when Apple's P/E finally broke over 20.)
Investors were content with the notion that Apple would post the equivalent of its market cap in earnings per share over the next ~15 years.
But what made Apple attractive was that, with a little imagination and a calculator, it was pretty easy to suppose that Apple could generate that 15 years of earnings in closer to 10 based on how fast those earnings are growing.
That 50% — the difference between what is and what may be — is why we invest.
It's rewarding — and I don't just mean financially. What if that 50% comes in closer to 40%? Guess what: You're not wrong; you just made a little less money on your investment, and you still get to feel good about yourself. Cash and self-esteem?
Congratulations! You're a bull market genius!
The Midas Touch
Now don't worry, I'm not pointing a finger here. I'm a bull market genius, too. It's a simple formula. Some numbers + some luck = everything I've touched over the last decade has turned to gold.
A good captain knows when the wind is at his back. A good poker player knows when to fold 'em. New circumstances mean new equations. The reality is that it might be time to tweak that bull market genius formula. And I'll tell you: Wall Street just changed its formula. That's why we saw an historic stock market rout last week.
I say "formula" as if the numbers somehow make it true. But all those numbers are trying to do is codify human emotions, your emotions, like how your self-esteem is soaring right along with your brokerage statement.
Of course, the opposite is also true: When the bottom line starts falling, you start thinking, "I must've been an idiot for buying that new car..."
And what do you do when you feel like a large purchase you just made might've been a bad idea? Maybe scale back on future spending a little bit?
Huh... and you say every economist, investment bank, and think tank just lowered its GDP estimates. Interesting... it's like they know what you're thinking.
An interesting thought hit me over the weekend: I made a little joke earlier about how our self-esteem, our sense of worth and value rises in a bull market. We make a couple good decisions, make a little loot, and maybe we tweet about it on Instafacechat. Maybe we dig around Yahoo! Finance a little more, you know, to find our next conquest. Maybe we troll around Airbnb and Google "flights" for a little weekend getaway...
So Facebook, Twitter, and Google get nearly all their revenue from ad spending. Apple and Amazon are less dependent on ad revenue, but ads are still an important business for them.
If you've felt that your value has gone up over the last decade, well, it has — quite literally. It is the value of your data, the amount of time you spend online, the websites you visit, the things you search Google for, where you go that Siri maps that have propelled all of these companies to pretty incredible heights.
The Spy You Invited in From the Cold
Add up the market valuations for Amazon, Facebook, Microsoft, Apple, and Google and you get $4.8 trillion. Total U.S. GDP is about $17 trillion. These five companies — backed by your data — are equivalent to nearly 30% of the entire output of the U.S. economy.
Congratulations, you have truly made it to the big leagues.
Sadly, I have to now warn you that your time at the top may be short-lived.
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You know what the first thing to go in a big, bad bear market is, right? Ad spending. It dries up faster than the crowds at the 2020 Olympics.
It's not that ad spending is completely discretionary. Ads work, the impact is measurable. But when a company that's already struggling a little to make earnings estimates suddenly sees a new macro threat to sales numbers, that company is highly likely to pull back on ad spending.
Who are these struggling companies? Most retailers — any economic slowdown has to be seen as a major threat to Macy's, JCPenney, and probably Kohl's; automakers — GM and Ford have already seen huge drops in China sales; and entertainment — Disney (NYSE: DIS) has already closed its parks in China. You gotta think Disneyland Paris is likely to shut down at some point. And, how do you feel about a trip to Orlando? Are you still pining for that cruise through the fjords?
Less travel means less gasoline burned, which means Russia and Saudi Arabia start losing money.
You see what you and your inflated sense of self-worth have done???
Just kidding about that last thing.
I'm really curious to see how Facebook and Twitter (less so) fare in a real bear market. Facebook has been completely a bull market phenomenon. Your value to Facebook's ad sales has done nothing but go up since the company IPO'd in 2012. What if we all have less to brag about and our engagement with Facebook goes down at the same time companies are pulling back on ad spending?
I get this mental image of a giant boulder rolling down a hill and smashing through a quaint Swiss town. I know, kinda weird.
Two more questions and I'll let you go. About the incredible speed at which stocks sold off last week...
Have you watched the news at home or come across some news story that had you proclaiming things like, "No one is leaving the house for a month" or "We're cancelling next year's vacation" or "Nobody spends any money on dinners out, we're gonna save money and only eat canned soup and frozen chicken nuggets until this virus thing blows over"?
I expect you're alone if you voiced any concerns or fears to your family members in your home over the last week.
So, do you have Siri or Alexa in your home? Mmmhmmm. Thought so...
Until next time,
A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He is also the managing editor of the Wealth Daily e-letter. To learn more about Briton, click here.
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