Value investing isn’t dead – it just changed. However, there are many investors that are still stupefied that just buying tried and true companies at low valuations no longer produces the same results that it once did. Instead of recognizing what’s changed, these investors proclaim that the markets are “broken”, valuation doesn’t matter, or blame the Fed’s low interest rate policy over the past 15 years for juicing growth stocks. None of these excuses hold water, especially the latter now that rates are higher and “value” stocks are still struggling.
We believe that a big part of the answer is the tremendous scale of the digital economy. Instead of a leading company having tens of millions of customers, the leaders of today’s digital economy have billions of users worldwide. These platforms might have started off in a particular service or sector, such as selling books online, providing internet searches, or mailing DVDs. However, now they have such massive scale and customer loyalty that they can disrupt and compete in nearly any sector they please.
Digital Economy |
Customers |
Alphabet | 2.49bn YouTube monthly users 3 billion Android users |
Apple | 2.2 billion active devices |
Meta | 3.24 billion daily users |
Amazon | 2.4 billion monthly visitors 310m active users |
Microsoft | 1.2 billion Office users 1 billion Windows users |
Netflix | 278 million active users |
Source: company reports
Traditional Economy |
Customers |
JPMorgan | 2.49bn 80 million customers |
General Motors | 61 million vehicles in operation |
UnitedHealth | 52 million customers served |
McDonalds | 69 million served daily 310m active users |
Comcast | 32.3 million internet subscribers 1 billion Windows users |
T-Mobile | 99 million subscribers |
Consider today’s situation. Apple is not just selling phones. It’s starting to branch into financial services and movies. Amazon isn’t just the world’s largest e-commerce site. It also built one of the world’s largest transportation networks and is moving into healthcare services. Alphabet has its hands in many different lines of business ranging from autonomous driving, e-commerce, payments, and medical devices. These firms are not contained to just one sector – they are omnipresent. Their massive scale allows them to capture incremental profits by doing previously outsourced services themselves and expanding into new parts of the world’s economy and our lives.
Our world is undergoing meaningful change and disruption. Investors shouldn’t view the world with the same lens that they did 20 years ago. Spotting low P/E (price/earnings) ratios doesn’t produce the same results it once did. Not only does this myopic approach underestimate the long-term earnings power of these massive digital leaders, but it also fails to recognize that many players in the traditional economy are at risk.
As Stephen Hawking once said, “Intelligence is the ability to adapt to change”. The intelligent investor needs to do the same.
The opinions expressed are those of Harrison Financial Services as of July 25, 2024 and are subject to change. There is no guarantee that any forecasts made will come to pass. This material does not constitute investment advice and is not intended as an endorsement of any specific investment or security. Please remember that all investments carry some level of risk, including the potential loss of principal invested.