There is more algebra if I do that. (profits from foreign sales/U.S. GDP) = (profits from foreign sales/foreign GDP)(foreign GDP/U.S. GDP)
Is there reason to believe that this will grow faster than (profits from domestic sales/U.S. GDP)? At this point, I don't think so. Where in the world is there a dire shortage of Internet ads and Teslas?
Quick hack - adjust by foreign ownership of US equities? And assume it roughly matches foreign GDP and company revenue. Or the split in revenue between the components of GDP.
In which case, Apple, Tesla and Meta would look slightly worrying.
After a few Duckduckgo searches these appear to be the fraction of US revenue for 6 of them:
- Alphabet: around 55% from outside the US.
- Amazon: around 68% from the US.
- Apple: around 67% from outside the US.
- Meta: around 56% from outside the US.
- Microsoft: Around 50% and 50%.
- Tesla: Around 55% from outside the US.
So a large part of their revenue comes from outside the US, but apparently none of them is too dependent either in the US or the rest of the world (say 80/20 or 20/80).
Great quantitative analysis, but you’re probably missing the key issue. US deficits are leading to money printing which leads to “real/total “inflation, that includes everything everyone buys, including M7 shares. Which absorb most of the printed money. I’d guess that much of the money sellers of any one M7 stock get are reinvested into shares, especially the other M6 companies, maybe even half but very likely more than 20%.
The increased cost of buying 100 shares of each of M7 companies is not, and has not been part of economists’ inflation definition, but as the number of US millionaires goes up, the prices of what the rich are buying are going up faster than CPI.
Unlike tulip mania, limited by tulips, there seems little limits on stock splits and other ways for the rich investors to continue getting richer much faster than median worker-and both CATO donors, Dem donors, Rep donors and most rich folk don’t want to stop feeding at the trough of US cash.
Splits usually help the rich current owners have a more liquid market, with more new buyers. A lot more stock buyers, especially individuals, will buy Apple at 100 but not at a 1000, without caring so much about 1 billion vs 10 bln shares outstanding. As these new buyers buy at a far lower nominal price, the price continues to go up. All new investors are helping old, usually richer, investors, so it’s not at the expense of the majority of current stock market investor owners. Tho, like higher house prices hurt the new, first time buyers, higher share prices reduces the number of shares new investors can buy within their budget.
More working folk are understanding, like me, that the rich are getting richer, faster, which is why inequality is going up. What is to be done? Asks Lenin, but also many who are unhappy with the growing inequality. I see more support for wealth taxes rather than regressive VAT, tho that may be my own confirmation bias. Little political support for less govt spending-and I’m tired of supporting less govt and losing in elections, too, like so many Reps.
I've heard your opinion on stock price before but never any evidence it might be true. My guess is it might be true for day traders and a few others but not enough to make a difference. I'd bet the vast majority of stockholders have mostly or all mutual funds where stock price makes even less difference. Note that M7 all have rather high stock prices. I could find a median price for all stocks but bet it is lower than most M7. Do you really think their valuations would be higher if they split more?
I agree there seems to be more support for a wealth tax than vat but maybe not really much for either. I wouldn't want to guess how that might change in the future. Still no idea why you predict a wealth tax. Note that according to wikipedia, wealth taxes have gone from 12 to 5 of the 36 oecd countries.
GOP talks about less govt spending but when in control they add new spending far more than any cuts they make.
The way I calculated the profit was by taking the market capitalization and dividing by the the PE ratio. On Yahoo, this calculation is updated at least every market day and probably hourly, but it uses the trailing twelve month reported profits for that calculation.
You should read earnings releases. Apple regularly earns $20-25b each quarter and Microsoft is slightly behind. Their P/E ratios are over 30, implying a 3% yield, which arguably competes poorly against a 5% short term government bond. There are also many stock with 5% dividend yield and many stocks with a P/E < 20.
Just look at the 1st column under TTM (#s for last 4 quarters). Apple had a net profit to common shareholders of $95,171,000,000 since all numbers in 1000s of dollars. And this shouldn't seem ridiculous to you, either since the market cap of the company is $2.692 trillion dollars. If it were only making $95 million dollars the PE would be 31,000 rather than 31 as reported. Do you not believe that Apple makes almost 100 billion dollars of profit in a year?
OK. P/GDP = 11/26 = .28/26 * 40. The weighted average P/E for the big 7 is about 40. And .28/26 = 2.8/26 * .1 so you're right. They account for 10 percent of profits
“Moreover, the profit margins in most of these areas are more likely to shrink than expand over the next several years”
I just want to point out that many people, (including me on many occasions) have had similar, reflexive thoughts over the past 25 years. I don’t know what else to say. Margins shrink but categories and services merge?
10 years ago, at least 2 of these companies were considerably smaller. Will the future M7 still be these same companies or, whatever contemporary 7 high-fliers?
Fascinating - kind of fun to think about this along with you Arnold.
I used to think Tesla was niche too, but wow I was scanning a list of top selling cars the other day and Tesla (in 2023 so far) has the #4th and #11th best selling cards in the US. WOW!
I've noticed this as well. I invest in individual equities, and avoid big tech stocks. My portfolio has underperformed by a wide margin. Although I haven't done the math, I'm pretty sure that most of the valuation increase in big tech stocks has come from multiple expansion (vs. earnings growth). For example, I recall that a few years ago Apple was a 10 P/E. I suspect this multiple expansion has been caused by several things, including: a). inflows from index funds, which I suspect create some sort of price momentum effect, and/or b). foreign inflows, which may favor brands that are recognized around the world (e.g. big tech).
If a). is true, this could mean a meltdown in big tech stocks could be swift and severe.
I am not a Tesla bull since there are all sorts of headwinds. But it soeems a bit odd to call Tesla a "niche" when the Tesla Model Y is the world's best selling vehicle. Not the best selling electric vehicle, but for the first time ever an electric vehicle leads the field. When it is building the biggest factory in the world in Mexico. So there is cetainly upside in a way that doesn't depend on looking at screens.
Electric cars depend on lithium, copper, silver, cobalt, nickel, and other elements that are in short supply that will constrain the growth of the industry. As the industry grows, the price of the elements rises sharply until the cars are too expensive.
Also, the US political system seems more hungry to reign in apparent monopolists/oligopolies which fit many big tech companies. Perhaps either a court-ordered breakup or competition will cut into their valuations.
Are you now an expert in corporate valuation? P/E used for valuation works best for mature no growth stocks that more resemble bond like investments. As to any specific "7" please tell me the degree of excessive pricing by the market in these stocks. If something is overpriced vs what the underlying fundamentals of a given name suggest, one should be able to say how much of future growth one is paying for today. Doing so better dimensions risks of overpayment driven by short term variables )which can be due to mood and momentum affecting supply and demand for a stock)vs longer term fundamentals.
Pricing a growth curve as a company at some future date moves towards stabilized growth (say inline with nominal GDP) can be challenging, but when does allows for one to dimension how aggressive market participants are pricing future growth and risks related to any overpayment.
Some of the names you mention are not overly priced by the market which is what you suggest via P/E analysis.
I mostly agree with you except one rather important consideration. No matter how overvalued those sticks may be, they can always become even more overvalued.
Ok, another likely difference too. My guess is despite some pressure on profit margins, the total profits of the M7 will more likely than not at least keep up with inflation.
I agree I have no proof my position is different than Kling's but his statements on profit margins and total M7 market cap suggest he doesn't see profits going up.
I think the assumption is that most of these companies are virtual monopolies and should be valued as such:
- Apple: No one can make a phone that will compete with the IPhone.
- Microsoft: No one can make an operating system and office suite that will compete with Windows and Office. (*)
- Amazon: No one can compete with Amazon.
- NVidia: No one can make a GPU that will compete in terms of performance and cost with NVidia's.
But this logic fails in some cases. The IPhone is a semi-luxury good but an affordable one for a large part part of the world's population, which makes it very difficult to come up with a competing good. I see Tesla as also trying to position itself as a semi-luxury good manufacturer, but we already have luxury and semi-luxury car manufacturers and none of them is close to Tesla's market cap.
Also, if you are NVidia you know that for some company (Graphcore?) to take a large part of the GPU market from you it's going to take years, if at all. GPUs are a physical product. But then how long does it take for some company to take a large part of Google's search market (60% of their revenue?) away from them. Theoretically, you just need to convince a lot of people to change their default search engine from Google to X and allow company X to scale as its load increases. A few weeks? A few months?
Agreed. But as of now they seem to have a 75% to 80% of the GPU market, and investors are probably betting on an explosion of GPU use due to AI and Nvidia keeping its market share. I think their position is not as unassailable as Apple's or Amazon's but less vulnerable than say Alphabet's.
Another problem with Nvidia is that most of their customers train their models on copyrighted material without paying the copyright owners. An industry based on theft won't grow fast indefinitely.
Total mkt cap of 2028 top 7 will be, adjusted for CPI inflation, much higher because Fed money printing is resulting in asset price inflation. What the rich are buying is getting expensive faster. Working folk pay about the same, make only a little more.
Why compare to US GDP when they are global companies?
There is more algebra if I do that. (profits from foreign sales/U.S. GDP) = (profits from foreign sales/foreign GDP)(foreign GDP/U.S. GDP)
Is there reason to believe that this will grow faster than (profits from domestic sales/U.S. GDP)? At this point, I don't think so. Where in the world is there a dire shortage of Internet ads and Teslas?
Quick hack - adjust by foreign ownership of US equities? And assume it roughly matches foreign GDP and company revenue. Or the split in revenue between the components of GDP.
In which case, Apple, Tesla and Meta would look slightly worrying.
For (P/E)(S)(R/GDP) you can also break out sales from US and world, so
(P/E)(World_S/US_S)(US_S)(R/GDP)
When these companies were small the US share of sales was larger, but on average it has declined as they became more global.
India and Indonesia
It's a fair question, but I think the assumption being made is that most of these companies' revenue is generated in the United States.
After a few Duckduckgo searches these appear to be the fraction of US revenue for 6 of them:
- Alphabet: around 55% from outside the US.
- Amazon: around 68% from the US.
- Apple: around 67% from outside the US.
- Meta: around 56% from outside the US.
- Microsoft: Around 50% and 50%.
- Tesla: Around 55% from outside the US.
So a large part of their revenue comes from outside the US, but apparently none of them is too dependent either in the US or the rest of the world (say 80/20 or 20/80).
Great quantitative analysis, but you’re probably missing the key issue. US deficits are leading to money printing which leads to “real/total “inflation, that includes everything everyone buys, including M7 shares. Which absorb most of the printed money. I’d guess that much of the money sellers of any one M7 stock get are reinvested into shares, especially the other M6 companies, maybe even half but very likely more than 20%.
The increased cost of buying 100 shares of each of M7 companies is not, and has not been part of economists’ inflation definition, but as the number of US millionaires goes up, the prices of what the rich are buying are going up faster than CPI.
Unlike tulip mania, limited by tulips, there seems little limits on stock splits and other ways for the rich investors to continue getting richer much faster than median worker-and both CATO donors, Dem donors, Rep donors and most rich folk don’t want to stop feeding at the trough of US cash.
Progressive wealth taxes are coming.
Stock splits don't really help the rich get richer. At most they help some at the expense of the majority.
I agree with what you say about the rich getting richer.
I'm curious why you think this leads to a wealth tax.
Splits usually help the rich current owners have a more liquid market, with more new buyers. A lot more stock buyers, especially individuals, will buy Apple at 100 but not at a 1000, without caring so much about 1 billion vs 10 bln shares outstanding. As these new buyers buy at a far lower nominal price, the price continues to go up. All new investors are helping old, usually richer, investors, so it’s not at the expense of the majority of current stock market investor owners. Tho, like higher house prices hurt the new, first time buyers, higher share prices reduces the number of shares new investors can buy within their budget.
More working folk are understanding, like me, that the rich are getting richer, faster, which is why inequality is going up. What is to be done? Asks Lenin, but also many who are unhappy with the growing inequality. I see more support for wealth taxes rather than regressive VAT, tho that may be my own confirmation bias. Little political support for less govt spending-and I’m tired of supporting less govt and losing in elections, too, like so many Reps.
I've heard your opinion on stock price before but never any evidence it might be true. My guess is it might be true for day traders and a few others but not enough to make a difference. I'd bet the vast majority of stockholders have mostly or all mutual funds where stock price makes even less difference. Note that M7 all have rather high stock prices. I could find a median price for all stocks but bet it is lower than most M7. Do you really think their valuations would be higher if they split more?
I agree there seems to be more support for a wealth tax than vat but maybe not really much for either. I wouldn't want to guess how that might change in the future. Still no idea why you predict a wealth tax. Note that according to wikipedia, wealth taxes have gone from 12 to 5 of the 36 oecd countries.
GOP talks about less govt spending but when in control they add new spending far more than any cuts they make.
TTM-NVDA- $10.17 billion
TTM-AMZN- $13.00 billion
TTM-GOOG- $59.13 billion
TTM-AAPL- $93.32 billion
TTM-TSLA- $10.57 billion
TTM-MSFT- $72.08 billion
TTM-META- $22.18 billion
Sum Big 7- $280.45 billion.
Total US corporate profits right now seem to be $2800 billion dollars annually, so the Big 7 account for just about 10% of that.
As I understand it, TTM is gross revenue, not profit. These figures seem way to high to be net profit.
The way I calculated the profit was by taking the market capitalization and dividing by the the PE ratio. On Yahoo, this calculation is updated at least every market day and probably hourly, but it uses the trailing twelve month reported profits for that calculation.
An example for AAPL
https://finance.yahoo.com/quote/AAPL/financials?p=AAPL
I don't understand. That page lists profits, and they are almost two orders of magnitude lower than what you came up with in your comment.
You should read earnings releases. Apple regularly earns $20-25b each quarter and Microsoft is slightly behind. Their P/E ratios are over 30, implying a 3% yield, which arguably competes poorly against a 5% short term government bond. There are also many stock with 5% dividend yield and many stocks with a P/E < 20.
Just look at the 1st column under TTM (#s for last 4 quarters). Apple had a net profit to common shareholders of $95,171,000,000 since all numbers in 1000s of dollars. And this shouldn't seem ridiculous to you, either since the market cap of the company is $2.692 trillion dollars. If it were only making $95 million dollars the PE would be 31,000 rather than 31 as reported. Do you not believe that Apple makes almost 100 billion dollars of profit in a year?
See the note at the top of the page- all numbers are in 1000s of dollars.
OK. P/GDP = 11/26 = .28/26 * 40. The weighted average P/E for the big 7 is about 40. And .28/26 = 2.8/26 * .1 so you're right. They account for 10 percent of profits
TTM is a stand in for "trailing twelve months"- so the figures are the net profits over the last 12 months. I double checked this two different ways.
“Moreover, the profit margins in most of these areas are more likely to shrink than expand over the next several years”
I just want to point out that many people, (including me on many occasions) have had similar, reflexive thoughts over the past 25 years. I don’t know what else to say. Margins shrink but categories and services merge?
10 years ago, at least 2 of these companies were considerably smaller. Will the future M7 still be these same companies or, whatever contemporary 7 high-fliers?
Fascinating - kind of fun to think about this along with you Arnold.
I used to think Tesla was niche too, but wow I was scanning a list of top selling cars the other day and Tesla (in 2023 so far) has the #4th and #11th best selling cards in the US. WOW!
I've noticed this as well. I invest in individual equities, and avoid big tech stocks. My portfolio has underperformed by a wide margin. Although I haven't done the math, I'm pretty sure that most of the valuation increase in big tech stocks has come from multiple expansion (vs. earnings growth). For example, I recall that a few years ago Apple was a 10 P/E. I suspect this multiple expansion has been caused by several things, including: a). inflows from index funds, which I suspect create some sort of price momentum effect, and/or b). foreign inflows, which may favor brands that are recognized around the world (e.g. big tech).
If a). is true, this could mean a meltdown in big tech stocks could be swift and severe.
The Swiss Central Bank has invested their enormous profits from printing money into big tech stocks. When they sell, the prices will fall sharply.
There simple nowhere else to go right now. Us tech stocks is safest paper right now. Compared to everything else.
And its liquid too with huge capitalisation. So as long as there is no alternative... And I don't personally see any alternatives right now.
I am not a Tesla bull since there are all sorts of headwinds. But it soeems a bit odd to call Tesla a "niche" when the Tesla Model Y is the world's best selling vehicle. Not the best selling electric vehicle, but for the first time ever an electric vehicle leads the field. When it is building the biggest factory in the world in Mexico. So there is cetainly upside in a way that doesn't depend on looking at screens.
Electric cars depend on lithium, copper, silver, cobalt, nickel, and other elements that are in short supply that will constrain the growth of the industry. As the industry grows, the price of the elements rises sharply until the cars are too expensive.
Also, the US political system seems more hungry to reign in apparent monopolists/oligopolies which fit many big tech companies. Perhaps either a court-ordered breakup or competition will cut into their valuations.
Are you now an expert in corporate valuation? P/E used for valuation works best for mature no growth stocks that more resemble bond like investments. As to any specific "7" please tell me the degree of excessive pricing by the market in these stocks. If something is overpriced vs what the underlying fundamentals of a given name suggest, one should be able to say how much of future growth one is paying for today. Doing so better dimensions risks of overpayment driven by short term variables )which can be due to mood and momentum affecting supply and demand for a stock)vs longer term fundamentals.
Pricing a growth curve as a company at some future date moves towards stabilized growth (say inline with nominal GDP) can be challenging, but when does allows for one to dimension how aggressive market participants are pricing future growth and risks related to any overpayment.
Some of the names you mention are not overly priced by the market which is what you suggest via P/E analysis.
They will revert to the mean like any past corporation, but it might take longer for it to happen than one can continue to live.
I mostly agree with you except one rather important consideration. No matter how overvalued those sticks may be, they can always become even more overvalued.
Ok, another likely difference too. My guess is despite some pressure on profit margins, the total profits of the M7 will more likely than not at least keep up with inflation.
In the second paragraph you are not stating a difference with Kling.
Edit made.
I agree I have no proof my position is different than Kling's but his statements on profit margins and total M7 market cap suggest he doesn't see profits going up.
I think the assumption is that most of these companies are virtual monopolies and should be valued as such:
- Apple: No one can make a phone that will compete with the IPhone.
- Microsoft: No one can make an operating system and office suite that will compete with Windows and Office. (*)
- Amazon: No one can compete with Amazon.
- NVidia: No one can make a GPU that will compete in terms of performance and cost with NVidia's.
But this logic fails in some cases. The IPhone is a semi-luxury good but an affordable one for a large part part of the world's population, which makes it very difficult to come up with a competing good. I see Tesla as also trying to position itself as a semi-luxury good manufacturer, but we already have luxury and semi-luxury car manufacturers and none of them is close to Tesla's market cap.
Also, if you are NVidia you know that for some company (Graphcore?) to take a large part of the GPU market from you it's going to take years, if at all. GPUs are a physical product. But then how long does it take for some company to take a large part of Google's search market (60% of their revenue?) away from them. Theoretically, you just need to convince a lot of people to change their default search engine from Google to X and allow company X to scale as its load increases. A few weeks? A few months?
Nvidia faces many competitors like Intel, AMD, and Google. Their margins could easily fall in the next few years along with the stock price.
Agreed. But as of now they seem to have a 75% to 80% of the GPU market, and investors are probably betting on an explosion of GPU use due to AI and Nvidia keeping its market share. I think their position is not as unassailable as Apple's or Amazon's but less vulnerable than say Alphabet's.
Another problem with Nvidia is that most of their customers train their models on copyrighted material without paying the copyright owners. An industry based on theft won't grow fast indefinitely.
Total mkt cap of 2028 top 7 will be, adjusted for CPI inflation, much higher because Fed money printing is resulting in asset price inflation. What the rich are buying is getting expensive faster. Working folk pay about the same, make only a little more.
Otw good notes on the companies.