Small cap versus mega-cap

[MrPanda]

I have a question : Is it possible for the mega cap stocks like Apple and Microsoft to keep increasing their stock price and market cap at the same annual 20+ % rate they have been over the past 10-15 years ? Their market caps are already at 3trillion. If they were to grow at 20% annually for the next 10 years , they would be close to 20 trillion market cap in 10 years time ... can the total US and world economy accomodate such a rise ? If not, perhaps its better to invest in small cap stocks instead of mega-caps if one is going for maximum growth ? Just my thoughts, let me know what you think ...

[Value_Added]

Sure, anything is possible but it’s not likely.  Big tech is always a day away from some new innovation that turns the world on its head.  If these develop into additional high margin revenue streams, valuations and sentiment will continue in their favor.  With that said, their current offerings can become out of favor just as quickly and valuation could go the other way.

 

All businesses in their current form have a growth ceiling - even small caps.  It’s important to keep this in mind.  Just because something is small doesn’t mean it’s destined to be bigger.  Oftentimes when small businesses chase growth, it’s value destructive which will ultimately be reflected in the stock price.  Best thing to do is understand what you’re buying and understand how to value it.  Once you do, buy it with a margin of safety.  If you can’t, just index.

[Luca]

Take Microsoft as an example. 

Market cap: 3 Trillion

Earnings: 77b

Last 5 year Sales growth: 13.7%

PE multiple: 39x

 

So if you have 13.7% sales growth the next 5 years and margin+PE multiple stays stable you will get 13.7% return+1% dividend+1% buybacks-->15.7% annualized return. 

 

IF the multiple stays stable. Is 2.5% earnings yield a fair valuation considering interest rates and the quality of the business? In the current environment no, but if rates go to 2% again then maybe it's fair. 

 

If they have an increase in sales growth due to AI or whatever and they average 20% sales growth the next 5 years+stable multiple your returns will be great. 

 

If they have 10% sales growth for 5 years and the multiple readjusts for whatever reason to 25x you will make maybe a 5-10% return in 5 years. 

 

Does Microsoft have a margin of safety or is cheap? NO

 

Is it a great business? YES

Edited January 29 by Luca

[Luca]

Will a coal stock that makes 20% a year as cashflow yield for 5 years and buys back their stock beat microsoft? Very likely but you have the risk of commodity cycles and that it is not a great business. But small caps can easily beat large caps here and MAG 7 are a massive crowded trade right now. 

[villainx]

4 hours ago, Luca said:

But small caps can easily beat large caps here and MAG 7 are a massive crowded trade right now. 

 

Not the small caps stocks that I've been investing in.  Or it hasn't yet.

[Intelligent_Investor]

Over a short term on pure valuation I think there is a good chance small caps can beat the Mag 7, but long term its very hard to beat a capital light business that can compound equity at 20%+ for over a decade