At any time in American history before now have we ever had the situation in which the companies whose stocks comprised so much of the total value the aggregate stock market and, more importantly, so much of the increase in value of the stock market indices, had never paid a dividend? What if anything does that mean?
My inclination is to believe that it means that the financial economy has become completely unmoored from any relationship with the real economy but I’m open to other interpretations.
You are noticing a trend concentrated in the tech sector, symbolized by FANG.
I am not smart enough to figure out if the tech sector stocks are completely unmoored from the economy, but my observations on these companies that pay no dividends.
First is Facebook / Google, also Salesforce.com, Red hat. All profitable growing companies that can pay dividends but choose not to in the belief they are growth companies and theoretically could do better to shareholders then paying dividends by reinvesting their profits in the business. The flaw is each has a growing stockpile of cash which implies they don’t see enough to invest in.
The second group is Tesla and the unicorns Lyft / Uber. Those companies have negative cash flow never mind profits and it’s unclear if they have a viable business model; their is a speculative mania here.
A special category is Amazon; something noticed by Henry Blodget is Amazon has positive and growing cash flow but keeps investing the cash in new businesses or in infrastructure so ends up with no profit. In theory someday they will need less investment and be a very profitable company but that day could be never; as Bezos like to think long term in spans of centuries.
So all in all, the valuations range from sane to roulette wheel like.
The true speculation is in crypto currency; the technology will have many uses; but To ascribe value on hashes whose main real life use is trading illicit goods is tulip level insanity to me.
Final point is hoarding cash doesn’t carry any penalty when interest rates are so low. When interest rates start rising, the calculations of Facebook/Google will change.
Amazon has another difference: it’s not making money in its core business. It has a profitable quarter here and there in retail but overall it’s losing money on it. It makes a lot of money in web services. Here’s a revealing chart:
AWS started with a big lead on its competitors but they’re coming up fast. IIRC it’s lost market share ever year for the last five years. I think the now 20 year old characterization of Amazon still has some truth in it: it’s an IPO looking for a business model.
It’s really hard to say about “core businessâ€.
I don’t work for Amazon and I don’t have special insight, but my feeling is some divisions – kindle, audible, books, zappos are fairly profitable. Having other merchants use Amazon infrastructure for shipping is profitable. Other parts like Video, Grocery are probably losing a lot of money.
A big part of AWS losing share is as Amazon keeps going into new fields, an ever growing list of competitors decide it’s not a good idea to fund Amazon by using AWS. But make no mistake, AWS will be #1 Cloud provider for a long time to come. The ecosystem they have is pretty sticky.
Migration sounds like a pretty darned good business to be in right now.
BTW here’s another good chart to reflect on:
I see a couple of future constraints on Amazon. Point 1: Its growth has been tolerated because (a) it’s young and (b) not yet that large and (c) government regulators are still getting used to this Internet thingy. Sooner or later, Europe or the US will notice it’s become a Big Bad Monopolist and break it up or put up obstacles to keep it from progressing down some paths. Wait for the next Democratic administration in the wake of the next major depression.
Point 2: I think the time has passed when Walmart might become an online sales behemoth to rival Amazon. But there are more and more small-scale retailers gaining familiarity with the net and drawing customers, so it’s not likely Amazon is going to grab the whole thing. More importantly, it’s got Alibaba as a rival — a half trillion dollar company which has barely begun to push into the retail consumer market. My suspicion is Alibaba is going to do quite well in the next half century. Eventually, I also suspect, we’ll see an Indian on-line merchandising giant, and perhaps by 2100 there’ll be one or two big African on-line firms.
Point 3: Jeff Bezos is 53. Eventually someone else will run Amazon, and history suggests not as successfully.
I think Walmart is likely to beat Amazon in the online space eventually. After a late start they’re now growing enormously in online sales. And they actually make money in retail.
Getting back to the subject of the original post, “growth stocks” with rising prices despite poor or nonexistent dividends have been with us for some time — at least since the 1960’s, and perhaps longer if I’d paid attention.
What seems to be happening now is that a lot of companies are not doing that well — their stocks have their ups and downs but it’s just a handful that expect to see sales rise for years to come. Amazon YES, Intel YES, Sears Roebuck NOT SO MUCH, Radio Shack DEFINITELY NOT, AMD WHO KNOWS?
Also it’s a different market. Not as many elderly ladies waiting on the quarterly check from the power company that Papa invested in, more retired cops waiting on the monthly pension check derived from investments in sixteen investment funds, more “angel” investors plowing money into internet startups with the hope of extracting big payoffs even before these new companies reach their IPOs.
Also, I think, the people who run companies these days have different goals and ways of operating than those of fifty years ago. Company managers aren’t as interested in growing at a steady 3-4% per year and paying out most of their profits as dividends. They’re looking for larger growth or a boost from selling off a company division or two or breaking into new markets in a big way. The old family firms are fading,
It’s a different world.
Dave:
You could be right. I Am Not A Businessman!
But a couple more points: (1) Amazon can always become more profitable, by replacing humans with machines in its warehouses, and by slightly boosting its prices. (2) I think there’s a ceiling over Walmart’s prospects because most of us think of it as a low or medium quality outlet. I wouldn’t think of driving off to Walmart to buy a good pair of shoes or college textbooks or a computer motherboard, so the thought of looking for them at Walmart.com doesn’t come to me naturally. Checking Amazon, on the other hand, seems to make complete sense. I also suspect that Walmart simply wouldn’t move as much high quality expensive merchandise in their retail stores as online, so ordinary customers might find shopping in physical stores disappointing. Other words, I think Walmart would have image problems if it attempted to become an online merchandise giant. It might find the magic path to success, but that might cost it what it already has.
I am not in either the bull or bear camp on Amazon. What I will note in the chart of exponential growth with zero profits is it is fuel for both sides, the bears say there is no margin and Amazon is trying to make it up on volume, the bulls say Amazon is reinvesting all its profits. I fall somewhere in between, clearly a lot of investments they make in warehouses and data centers are non-optional, but clearly a big chunk of Amazon’s investment is discretionary because otherwise they wouldn’t have gotten into so many fields of business. And all those investments didn’t become vapor; wearhouses and data centers are the railroads of today; they are valuable themselves.
As to future anti trust threats; who’s the owner again of the Washington Post that’s driven the agenda on scandals of the current President. How many cities and states would prostitute themselves to have HQ2? Anti trust may come, but it’s going be a slow slow thing.
I think the bigger story is we ought to wish there were more Bezos and Amazon’s around. Amazon’s the one company who does want Dave identifies as a reason for the sluggish economy, a lack of corporate investment. They are willing to invest, invest, invest instead of collecting cash.
I don’t really know enough to comment, but I have this sense that the whole thing is a house of cards.