Tech Stocks Are the Best of the Best
While most mega-caps enjoy a few years of rapid growth before sputtering to a standstill, Amazon.com, Inc. (NASDAQ:AMZN) keeps moving up and to the right. It seems untethered from the usual laws of finance.
Two years ago, the e-commerce giant was valued at $204.2 billion. It was already an established titan, in other words, having grown almost 300% between 2010 and 2015.
This put Amazon in good company.
Only 23 other firms can boast of mega-cap status. Most of those firms are still growing, but at rates that would embarrass a tortoise. The bottom half can’t even crack 20% annual growth.
I don’t say any of this as an insult. These 24 companies are the pinnacle of their respective industries. They are the best. However, they aren’t the best of the best.
Sooner or later, their ability to grow is exhausted by the limitations of their field. Mining companies can only stick to mining. Oil companies can only stick to drilling.
Information technology stocks, on the other hand, can apply their skill set to a variety of problems, which is why they grow rapidly, regardless of size. They aren’t bound by the same constraints, because they have the luxury of throwing data at any problem.
Rank them by performance and see for yourself. Six of the top 10 performing mega-cap stocks were tech stocks; the remaining four were financials.
Industrials, energy, and mining didn’t make the cut.
|Company||1-Year Stock Performance|
|Alibaba Group Holding Ltd.||75.74%|
|Alphabet Inc (Google)||32.37%|
AMZN stock is sixth on this list. It has more than doubled in the last two years, an astonishing feat that brought its market capitalization to $466.7 billion.
But let’s get out of abstraction and into the weeds. Here is a real-world example of how tech stocks push at the margins, and how other companies fail to do the same.
What Sets Amazon Stock Apart
Amazon started its kingdom on a simple model: Sell books online. After conquering this business (and breaking the kneecaps of publishers and retailers along the way) Amazon decided to branch out. It started to sell everything.
Then came the advance into cloud computing, big data analytics, and consumer electronics. On some level, it was easy to rationalize these as a natural extension of Amazon’s core business.
For instance, Amazon’s cloud computing business emerged out of a need to manage its own network infrastructure.
But now Amazon is stepping definitively out of its wheelhouse. It is getting into the media business. Tech and media firms operate adjacent to one another, but the crossover is tricky to navigate. Trying to do both is the third rail of business.
We don’t have to go far to find an example.
This past week, Condé Nast Inc—one of the biggest magazine publishers in the world—shut down its online fashion retailer. (Source: “Condé Nast Closes Style.com Months After Its Debut,” The New York Times, June 13, 2017.)
It had invested $100.0 million into the project, hoping that an e-commerce play would help monetize its fashion magazines.
Money down the drain, dear reader.
Digital platforms work best when they are organized from first-principles, meaning they need to be built from the ground up. You can’t cut and paste them into 108-year-old companies.
Style.com, as it was called, was doomed from the start. Meanwhile, Amazon experienced tremendous success in the film business.
Its first feature film won Best Picture at the Golden Globes, and there are 80 million subscribers to “Amazon Prime,” which houses Amazon’s video streaming service. (Source: “Amazon Prime subscribers hit 80 million,” Business Insider, April 27, 2017.)
This ability is what sets Amazon apart. Despite its formidable market cap, the share price isn’t limited by the scope of its current businesses. Any time it wants, Amazon can choose to invade a sub-optimal industry and exploit its flaws.
Why AMZN Stock Is Headed to $2,000
I just want to reiterate an extremely important point: AMZN stock took five years to double from $100.0 billion to $200.0 billion, but it took only two years to go from $200.0 billion to $400.0 billion.
It is growing faster with age!
As such, I have absolutely no worries about the future of AMZN stock. This phenomenal investment is still on pace to reach $2,000 by 2020, which effectively means it is on pace to reach the sought-after $1.0-trillion valuation.
Apple Inc. (NASDAQ:AAPL), Alphabet Inc (NASDAQ:GOOG), and Facebook Inc (NASDAQ:FB) are also contenders for the $1.0-trillion mark, but I would put my money on Amazon stock. It is the ultimate growth machine.