Tera-Caps and Tech Outperformance | The Acquirer's Multiple®

In their latest episode of the VALUE: After Hours Podcast, Brewster, Taylor, and Carlisle discuss Tera-Caps and Tech Outperformance. Here’s an excerpt from the episode:

Tobias: Fellas, let me kick it off with these things.

Jake: Yeah, bring it.

Tobias: Because I just have some statistics. It’s not going to take a long time, but it kind of kick us off for a discussion about the assumptions that we’re making. The tera-caps, for people who don’t know, because I didn’t last week and I hadn’t heard that term before, but Apple, Amazon, Microsoft, Meta, and Google.

Bill: May or may not be any more, but yeah.

Jake: Yeah.

Tobias: Yeah, that’s fair. But I think it’s still top five or at the time this was done, top five. This is pretty recent, last week or so. So, Apple has grown since– I think this is since listing or since the data– He could find the data to ’85. This is the longest term possible that he could figure it out. The 25-year compound annual growth rate for Apple 22.3%, for Microsoft 25.7%, for Amazon 34.8%. At the size that they currently are, Apple is 11% of GDP, Microsoft is 8.5% of GDP, and Amazon is 5.7%.

If you take those growth rates and you project them forward five years, Apple gets to $7.6 trillion, Microsoft gets to $6.7 trillion, and Amazon gets to $6.3 trillion. Net GDP today is growing at about 3.5%. You project that forward to 2027, so five years forward, it gets $29 and a half trillion in GDP. Which means that those three, the tera-caps will be 70% of GDP. Now, I get the way of comparing a flow against a stock and you’re not allowed do that but it’s just to demonstrate the size of them.

Jake: Starting to talk about some real money there. That’s a lot.

Tobias: Does that mean we’re all just working for one of those five, and everything else like– We’re working for YouTube here, I guess.

Jake: Yeah, good point.

Bill: We are doing that.

Tobias: He makes a point that the valuations aren’t particularly stretched for the top five. But when you project forward relative to the size of the entire stock market or the entire economy, they’re getting a little bit big. Is it possible, is it sustainable? Has size forged its anchor, as Buffett likes to say?

Bill: Well, Buffett’s buying Apple right now. So, I doubt he thinks it does for Apple.

Jake: Is there any concern that, what, I think four out of those five sell advertising as part of their revenue base?

Bill: Yeah, you should be.

Jake: Which is historically been a procyclical business.

Bill: Yeah, I think the pushback, just looking at Apple, 45% of the revenue is in the Americas, it looks like. Hang on, let me get to the right column, 42. 24% in Europe. Got to love the Europe exposure right now. 18.7% in China, 7% in Japan, and 7% in the rest of Asia-Pacific. So, I’m just not sure GDP is quite the right metric.

Tobias: Yeah, that’s fair.

Bill: You’re talking about real global companies here.

Jake: Yeah.

Tobias: You could switch it around to gross national product, which would be what US companies earn globally. So, resident companies owned globally.

Bill: Yeah.

Tobias: You will find that it’s exactly the same numbers GDP. I don’t know how that works out, but they’re very, very tied together. So, it doesn’t change the analysis much at all.

Bill: Yeah. I guess. Google’s 54% international, 45% US. I don’t know. That would be the only quibble that I have. But I don’t disagree with the thought. This is what we were saying when all the stocks that were frothy, to say the least, I said, “If that group is correct, then they’re basically going to suck up all the economic profit in the US.” I don’t see how the math would work otherwise.

Tobias: The argument for these big five, isn’t that almost literally the argument for this big five being able to sustain the size that they are, that nothing competes with them really like that? When you look at how big they are relative to every other company, all of these companies could go on by themselves on an airline to fly everybody around?

Jake: Airline would never even notice. Those are time– [crosstalk]

Tobias: It wouldn’t notice. Yeah, it wouldn’t notice. The relative size is so much bigger.

Jake: Yeah.

Bill: Yeah.

Tobias: Is it in fact the case that they have actually extracted all of the economic profit from all these other businesses, because everybody’s compelled to advertise on Google, advertise on Facebook, buy Microsoft products, so on, buy Apple products? Is it fair that they are valued that way?

Bill: I think it’s hard to argue that it’s not fair. If it doesn’t work out, I think you look back and say, “Well, it’s obvious.” But Apple, they fucking take 30% of every transaction that’s digital over their platform and they do it because they can. In retrospect, I think it’s bogus that Microsoft doesn’t get 30% of everything on a PC. What a missed opportunity.

Jake: Yeah.

Tobias: Don’t give them any ideas, mate. [laughs]

Jake: Yeah.

Bill: As someone that owns a stock-

Tobias: Get a tail on it.

Bill: -I’ll be fine with it. This is garbage that Apple can do this. Not to mention their apps suck now. My buddy was just bitching about Apple Music. Apple Podcast is laughable. But somehow, they just work.

Jake: Yeah, you could make the argument that Excel is undercharged for given how useful that is in the world.

Tobias: Central to the–

Jake: Everything, right? [laughs]

Tobias: It’s like energy. It’s in everything. Yeah.

Jake: Yes, it’s the RuBisCO if we would go back to that segment on–

Bill: But yeah, the service is growth. Just in Apple, you’re looking at 2018, it was $39.7 billion. Today, it’s $68.4 billion and it’s a lot of margin. That’s $47.7 billion of gross profit on $68.4 billion of revenues. There aren’t many businesses historically that have done anything like that, and that own 89% share of American teens, and are going to tax everything that’s built upon them in perpetuity, unless somebody steps in and stops it.

Tobias: [crosstalk] Google is the first company that really makes money. Yeah. I saw a tweet today the amount of money that they’ve spent on lobbying antitrust.

Jake: Oh, yeah. One stat from this price of– [crosstalk]

Tobias: Good ROI.

Jake: We will get to. Yeah, real good ROI.

Tobias: Let’s get segue across this– [crosstalk]

Jake: That’s okay. We don’t have to go all the way. It’s just that 2014, there were zero DOJ antitrust cases filed. And the year after, we had an insane– I forget. We’ll get to the number, but billions and billions of dollars of M&A activity after that. [laughs]

Bill: Yeah, the thing about Apple though is– I don’t know what happens at the App Store. It drives me insane that they’re allowed to do that. But even if you were to file, it’s not a handset issue, because there’s plenty of handsets that people could choose. Like I said, something like 80% of US teens are choosing the iPhone. So, I don’t know that you can argue it’s a hardware issue. Can you decouple the software and the hardware? I don’t know.

Tobias: Where was Microsoft when the DOJ came down on them on the platform, on the desktop market?

Bill: Well, I think what– [crosstalk] Yeah, and they just tried to install a browser. Imagine, they should have taken 30% of everything. What a fucking miss.

Jake: Yeah. [laughs]

Bill: They just weren’t thinking big enough.

Tobias: Because Apple got themselves into that same position, they haven’t? They’re now where Microsoft was. And if they take 30%– [crosstalk]

Bill: It’s complete garbage.

Tobias: If you’re taking a 30% clip of everything that’s going through, you’re painting a big target on you.

Bill: Yeah. It’s not everything, right? It’s just digital goods. But if you’re on Roblox, they get their take no matter– They didn’t develop it. The Twitter, the stupid Super Follow things that I do, I’m on the desktop Twitter 98% of the time. The only thing that Apple is facilitating between me and the users is EasyPay and they’re taking 30%. Visa takes 2%.

Tobias: Why did they let Apple do that? Why do they use Apple and why don’t they use a payment platform?

Bill: Well, they have no choice. Well, because they’re on the app and they want Super Follows through the app. If you’re doing it through the app and it’s a digital experience, Apple gets their take. It’s the greatest toll road ever. It’s ridiculous. Shit, I don’t know, if it continues, but looking at it today, I don’t know how you can say, it’s egregiously valued.

Tobias: So, the risk is regulatory. What about VR? I guess, what’s the other tangential technology, I guess, that moves you off the fine to the next thing?

Bill: Yeah, but they’ve demonstrated a pretty good ability to go out there and copy. They’re not really known as innovators as much as they are really good copiers.

Jake: Yeah.

Bill: I don’t know, 4% cashflow yield on Apple looking at 2023 estimates? That can work.

Tobias: It’s not that–

Bill: It’s only 25 times. Eventually, it’ll go into 10, but how big [crosstalk] thesis.

Jake: What would Mauboussin say about that PE?

Bill: I think he’d probably say that you have to think about how long that competitive advantage period is going to exist and what the returns on incremental capital are, and then apply some sort of fade rate, which you can argue whether or not base rates even apply to a business that’s decoupled from base rates for this long. I don’t know that base rates apply to N equals one. How many businesses in history have grown from $143 billion in revenue to $198 billion in revenue in two years?

Jake: The base rate always applies, eventually.

Bill: Yeah, okay. But the when is a very important question.

Jake: True.

Tobias: You don’t think these businesses are different? Google was a different business to anything that’s gone before. Microsoft is a different business to anything– Apple, maybe that–

Jake: But is it? I could say that Google is just the combination of multiple businesses that existed before like Yellow Pages.

Tobias: That was a great business.

Jake: Postal service.

Tobias: That’s good business.

Jake: Well, what else? Putting up posters, advertising agencies. I don’t know. Let’s just– [crosstalk]

Tobias: Classifieds.

Jake: Classifieds, sure.

Bill: I don’t know. It’s going to be hard to displace.

Tobias: It’s like they’ve aggregated all of those newspapers all together into one place and their marginal cost is minimal. Those are pretty good businesses.

Jake: Yeah.

Bill: Look, eventually, the earnings multiples will be 10 times. But if it’s a trillion-dollar revenue business putting off $300 billion in cash, still got a lot of ways to go. I don’t know.

Jake: That’s a $3 trillion business?

Bill: Yeah, arguably. I don’t know. It maybe– [crosstalk]

Tobias: Well, [crosstalk] stick it in the 10-year and earn three point something percent. So, you’re already ahead of the 10-year and it’s growing, and they’ve got lots of levers that they can pull.

Bill: [crosstalk] I think the thing that’s hard about this is it makes sense. Intuitively, it makes sense. But here, you’ve got Berkshire’s out here– I think we’d all agree, Berkshire knows how to invest. They are buying Apple and Amazon as of recently. So, I don’t know. It makes the game hard.

Tobias: Snowflake. Few other things are in there.

Bill: Yeah.

Jake: Yeah. Well, if it was easy, we’d have nothing to talk about.

Tobias: That’s true.

Jake: [laughs]

Bill: Agreed.

Tobias: Who wants to take it?

Bill: Jake, go ahead. I don’t know, unless you want me to piggyback but I would just say, it actually is a natural segue.

Jake: Yeah.

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