American Consequences - August 2017


Furthermore, we need to think about valuations and the “life cycle” of a stock. When a company is young and growing fast – think greater than 10% a year – it deserves a higher multiple. As it matures, its growth slows and its multiple contracts, but the share price still rises as the fundamentals match the future expectation. You can see this with technology companies. We can use price-to-sales and the rate of sales growth to watch companies turn from high- growth tech obsessions to mature, profitable companies while still handsomely rewarding shareholders. The 2000 dot-com boom caused a big hump in these charts. But you can see below in the chart that an investor could have paid 10 times sales (usually a very expensive price) when Microsoft grew at 20% a year. Since then, revenue growth has slowed to about zero and shares trade for a smaller multiple. But shareholders were paid well. The same goes for Oracle. Note in the chart how sales growth slowed from 30% to 0%. It’s still

is still growing sales at 20% a year, while it trades for three times sales. In the context of other growing tech companies, that’s still fast growth and a relatively cheap price. AN INVESTMENT FOR THE LONG RUN Just like Bezos, you have to think long term as an Amazon shareholder. Its share price could be volatile in the short term given its valuation. However, if you give it three to five years, you can pretty much guarantee a few developments... First, Amazon will be bigger in the future than it is today. Unlike so many flash-in- the-pan tech companies, Amazon has major competitive advantages and an infrastructure that cannot be replicated. We often hear about how digital sales are killing other retail stores... But lost in all that hype is the fact that online purchases

making money, but sales have leveled off from the days of 40% and 50% growth. As a result, its price-to-sales multiple dropped, but shares have tripled . The important thing to note here: Amazon

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