Stocks A to Z / Stocks B / Berkshire Hathaway (BRK.A)
No. of Recommendations: 21
Prof. Damodaran has developed a model to estimate the breakeven revenue required to justify the current market cap of trillion dollar companies. The revenue growth rate required for the next 5 years is lowest for Aramco at 0.59% and BRK at 5.6%. It is highest for Tesla at 86%. Nvidia is at 26% and Apple 20%.
I will offer a simple model to reverse engineer from any given market capitalization, the revenues and profitability thresholds you have to meet, and allow you to come to your own conclusions.
The mechanics of the breakeven revenue process may make it seem like managers are bystanders in the process and that investing can be on autopilot, but they are not. In fact, when market capitalizations rise, and breakeven revenues run well ahead of current revenues, I would argue that management matters more than ever. Going back to the breakeven revenues that we computed for the twelve largest market cap companies in the world, I would make the case that management matters much less (if at all) in Aramco and Berkshire Hathway, where breakeven revenues are close to current revenues, and the investments needed to deliver those revenues have already been made, that at the companies that still have steep climbs ahead of them to get to breakeven revenues.https://aswathdamodaran.substack.com/p/trillion-do...
No. of Recommendations: 25
Perhaps one of the pithiest views in that link:
"In the aggregate, LLM ownership is being priced at $1.5 trillion or more, and the collective revenues, even generously defined, are less than $100 billion. It is entirely plausible that a big market exists for LLMs, and that one or even two of the players in this space will be winners, but in the aggregate, the market is overreaching."
I have long been a fan of the method he espouses here, which is following the reasoning backwards from current market cap: what good things would have to happen to the underlying business, how soon and for how long, for an investment at today's price to offer a reasonable return? Assuming that there will be a day in the future, perhaps ten years out, that the days of exuberant market multiples will end and they fall to merely high. The just decide if those things are plausible. If not, the stock is overpriced.
Jim
No. of Recommendations: 1
what good things would have to happen to the underlying business, how soon and for how long, for an investment at today's price to offer a reasonable return?
Just the other day I was asking what was the ROI of the very large investment Facebook made into the new business called "the metaverse"? Not only did they invest billions, tens of billions, they even changed the whole name of the popular company! So far, no real answers to that question, but the market cap sure has gone up since those very large investments.
No. of Recommendations: 1
Just the other day I was asking what was the ROI of the very large investment Facebook made into the new business called "the metaverse"? Not only did they invest billions, tens of billions, they even changed the whole name of the popular company! So far, no real answers to that question, but the market cap sure has gone up since those very large investments.They apparently have burned nearly $70B on this... imagine if they had invested that in AI back in 2021 instead...
Note: If they have invested $70B since 2021 (5 years) that is $14B annually, 30% cut would take that down to around $10B - still a lot of capital.
https://www.ft.com/content/d8e798a8-65db-44f1-8490...
Meta has set out plans to meaningfully cut back its metaverse efforts next year, as chief executive Mark Zuckerberg narrows his focus on winning the artificial intelligence race.
Executives at the $1.7tn social media company have discussed potential budget cuts as high as 30 per cent for its metaverse group, which will probably include job losses starting early next year.
...
Zuckerberg in 2021 announced a push to build an avatar-filled “metaverse” where users globally could socialise, game and shop in virtual spaces, going as far as to rebrand the company from Facebook to Meta.
However, that effort has been hampered by technical difficulties, safety concerns and a lack of consumer appetite, prompting some investors to pressure Zuckerberg to curb spending. The Reality Labs division has lost more than $70bn since 2021.
tecmo
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No. of Recommendations: 20
They apparently have burned nearly $70B on this... imagine if they had invested that in AI back in 2021 instead...
Well, we can't blame them too much for not seeing that particular detail of the future. LLMs work better than most folks expected.
But we can blame them for really bad capital allocation. I'd say it was pretty obvious even back then that it was extremely poor capital allocation at the hands of a too-powerful and too-desperate boss in the face of weakening of the blue app. Renaming the company after something you don't do? Really? I had to look up the name of their VR app/world. User count has been on a down trend for years, still in low 6 digits.
I would say that when the boss is very poor at capital allocation, a dividend would have been an outstanding choice : )
$70 bn equates to a one-time payment of $32.11 per share. For a sense of scale, that's around 8.5% of the average share price in the last five years.
Jim
No. of Recommendations: 1
"I would say that when the boss is very poor at capital allocation, a dividend would have been an outstanding choice : )"
Hahahahaha. Comment of the year for this board!
No. of Recommendations: 2
"I would say that when the boss is very poor at capital allocation, a dividend would have been an outstanding choice :)"
A better choice would be to not invest in a company whose boss is dumb/bad.
