The previous video was presented at the Digital-Life-Design (DLD) Conference, which occurred in January of this year. In this 15 minute clip, Scott Galloway discusses the Four Horsemen of technology: Amazon, Apple, Facebook, and Google. Each has carved its own niche in the modern technology world and plays a major role in the lives of most Americans and even most people in the world. With 1.75 billion smartphones in the world connected through the internet via mobile networks and wi-fi, we can begin to grasp the power that these companies have to shape the future evolution of technology.
At Intrinio, we offer full access to a whole host of financial data on these companies through our API, Excel add-in and Google Sheets add-on. We have used Intrinio data to analyze the trends observed by Professor Galloway. You can find all the supporting data in the Four Horseman Google Sheet, which was gathered using the Intrinio Google Sheet add-on.
Before we begin, it's interesting to make the observation that back in 2000, only Amazon and Apple were publicly traded companies. Amazon was a poster-child of the dot-com bubble and Apple was starting to find success in redefining itself. Google was beginning to make an impact on the internet with its revolutionary search engine and had just launched AdWords. Mark Zuckerberg was 16, had just transferred to Phillips Exeter Academy and was still four years away from launching The Facebook. The main point here is that 15 years ago, at the apex of the technology bubble in 2000, none of these companies had a dominate market position. Realistically speaking, only Apple had experienced major success. We can expect the next 15 years to be similar, with new entrants disrupting existing companies as technology evolves. However, it is likely that a major paradigm shift must occur for one or all of these players to lose their position as the Four Horsemen of the mobile era. Each of these companies are where they are today because they successfully transitioned their revenue models from a desktop environment to a mobile environment and were able to continue capturing market share as others failed to adapt.
Lets take a look at the recently reported last twelve months revenues and Zack's consensus revenue forecasts for 2015 and 2016 for the Four Horsemen:
[gdoc key="https://docs.google.com/spreadsheets/d/1LNRygMjOti7errtjSVPLUrU_Dj05m3bU1a1atbjF_2Q/edit" chart="Pie" title="Reported 2014 Revenue ($mm)"]
[gdoc key="https://docs.google.com/spreadsheets/d/1LNRygMjOti7errtjSVPLUrU_Dj05m3bU1a1atbjF_2Q/edit" gid="1961885633" chart="Pie" title="Zack's Wall Street Consensus 2015 Revenue ($mm)"]
[gdoc key="https://docs.google.com/spreadsheets/d/1LNRygMjOti7errtjSVPLUrU_Dj05m3bU1a1atbjF_2Q/edit" gid="830162448" chart="Pie" title="Zack's Wall Street Consensus 2016 Revenue ($mm)"]
As these pie charts illustrate, Amazon and Facebook are the current projected winners by Wall Street analysts, growing their revenues faster than Google and Apple. Apple is projected to increase its share in 2015, but slide slightly in 2016, while Google is projected to lose steam in 2015 and 2016.
When looking at the following graph, it is interesting to note that the profit margins of three of the Four Horseman are very close to one another. Amazon trails behind. This is largely expected since Amazon is the only primary retailer of the group and retailers tend to have much lower profit margins. However, its made up for in a high asset turnover. Yet what's most interesting here is that Amazon has made virtually no profit over the past 10 quarters.
[gdoc key="https://docs.google.com/spreadsheets/d/1LNRygMjOti7errtjSVPLUrU_Dj05m3bU1a1atbjF_2Q/edit" gid="627348650" chart="line" title="Historical Profit Margins"]
Professor Galloway's observation of Amazon is that it must open stores as flexible, robust "warehouses" to sell their inventory. Amazon's strategy is as "the last mile, last man standing", where Amazon leverages its cheap access to capital to build a massive network of fulfillment centers throughout the world. However, Professor Galloway notes per research by Satish Jindel that Amazon spent $6.6bn on shipping costs, but only brought in $3.1bn for shipping charges, leaving net shipping costs of $3.5bn. With 2014 revenue of $88.98bn, net shipping costs were close to 4% of total revenue. Amazon has historically had profit margins for the past 10 quarters on a trailing twelve months basis on average of 0.1%. Without the necessity to ship products to consumers, profit margins for Amazon would be closer to 3%.
[gdoc key="https://docs.google.com/spreadsheets/d/1LNRygMjOti7errtjSVPLUrU_Dj05m3bU1a1atbjF_2Q/edit" gid="1908684967" chart="Bar" title="Amazon vs. Brick & Mortar"]
When comparing Amazon (a pure-play online retailer) to Wal-Mart, Costco, and Target (mixed e-commerce and brick and mortar stores) it is clear that Amazon's margins would be closer to the average of these three players, around 2.5%. Since companies like Wal-Mart and Best Buy optimize their in-store pick up options, you can receive your items faster and potentially cheaper than Amazon - without the burden of shipping costs. Items are either already in the store or the store distribution system can be leveraged for a very low marginal cost versus sending a package via USPS, UPS, FedEx, or other accelerated shipping company. This means, as brick and mortar stores make it easier to pick up your items from their store (curbside pickup, for example) it now makes sense to use the e-commerce/brick and mortar shopping option to receive both lower prices and to get your product faster. Alternatively, leveraging services like Uber, the delivery process can be further optimized from store to front-door. This is something Amazon may struggle to adapt to due to its focus on delivery services such as the USPS. Professor Galloway hypothesizes that Amazon must acquire a brick and mortar company in 2015, with the likely candidates being Radio Shack, a major gas station chain or even the U.S. Postal Service. Otherwise, Amazon's achilles heel, it's net shipping costs, leaves the company vulnerable - especially if its cheap access to capital erodes.
Professor Galloway discusses Facebook's grip on the App Economy, wherein Facebook properties dominate all age groups with their Facebook, Facebook Messenger, Instagram, and WhatsApp mobile apps. While Facebook on its own is a dominant force, it is the acquisitions Facebook has made with its access to cheap capital that has propelled the company to its dominant position. Instagram was a phenomenal acquisition, where Facebook paid $1bn to acquire the company and it is expected to generate $250-400 million in revenues in 2014 and has over 300 million users. The worst acquisition, according to Professor Galloway, was Yahoo's acquisition of Tumblr for $1.1bn, which is expected to have "material" revenues and only has 200 million users.
The biggest concern for Facebook in 2012 was their ability to transition from deriving their primary revenues from their desktop-based webapp to their mobile applications. We can see in fiscal year 2012 on the previous profit margin graph that Facebook's profit margins slid to around 1% before their mobile advertising strategy began to pay off. The acquisition of Instagram was a key driver of this success due to their emphasis on visual and mobile. Engagement rates are extremely high on Facebook properties and the company has a unique position to understand user identities both within its ecosystem, but also on other Facebook connected apps. This unique value proposition for advertisers and the successful transition from webapp to mobile app for their advertising platform has now cemented Facebook as one of the dominant Four Horsemen. Facebook currently has the highest profit margin of the Four Horseman at 23.58% for fiscal year 2014.
As mentioned previously, Google appears to be losing market share. This is evidenced by its declining revenue growth relative to the Four Horseman and its falling profit margins, as seen on the profit margin graph. Google's Return on Equity, a measure of value creation for it's stockholders, has been declining consistently for the past 10 quarters. Google is losing momentum across the board in search volume, engagement rates and video posts. Also, Google+ and Google Glass are now deemed to be busts with no clear commercialization opportunities.
[gdoc key="https://docs.google.com/spreadsheets/d/1LNRygMjOti7errtjSVPLUrU_Dj05m3bU1a1atbjF_2Q/edit" gid="1283756845" chart="line" title="Return on Equity"]
While Google still has a dominant advertising service (AdWords) and a dominant position as the primary operating system in mobile phones (Android), it has seen its momentum slow in the past few years. However, Professor Galloway did not mention Google's opportunities for the future of the company, which includes self-driving cars, multiple bets on "the Internet of Things", and increasing bets in the life sciences technology sector led by the extremely active Google Ventures. Google has a significantly higher R&D Expense to Revenue compared to Apple, and is also very high compared to Facebook, which has much lower revenues. Therefore, we can see that Google is investing in the future, and likely making much more bold and expansive bets on the future compared to any of the other Four Horseman. With the Google ecosystem maturing and losing momentum, Google needs to hit a grand slam with one of its Google X projects in order to remain a dominant force for the next 15 years.
[gdoc key="https://docs.google.com/spreadsheets/d/1LNRygMjOti7errtjSVPLUrU_Dj05m3bU1a1atbjF_2Q/edit" gid="1869291543" chart="line" title="R&D Expense to Revenue"]
Finally. We are to Apple. The glamorous King of the Four Horseman. Professor Galloway describes Apple's luxury brand competitive advantage based on its attention to craftsmanship, its iconic founder, its ability to achieve an exceptional price point, its complete vertical control of its value chain, its global reach, and its self-expressive benefit. It is these factors that allow Apple to continue dominating the other three horsemen. Professor Galloway focuses on the psychology that Apple has achieved that no other luxury or technology brand has ever achieved in modern history. He asserts that the luxury brand Apple has built implies that by owning an iPhone you are a better mate and are more capable of providing a prosperous future for offspring. He shows several graphs overlaying Apple iOS and Andriod on maps of New York City and Los Angeles to show that the higher income parts of the city use iOS. Apple products have become a modern day status symbol. This is extremely difficult for any company, especially a technology company, to achieve and is a major driver for why Professor Galloway believes Apple will be the first $1 trillion brand. Ironically (or not), the Intrinio intrinsic value (based on the default assumptions of Wall Street consensus growth and mean reversion margins) implies that Apple has an intrinsic value of just less than $1 trillion. As seen on the Return on Equity graph below, Apple has consistently achieved a higher Return on Equity for the past several years, illustrating its dominant position for creating value and its place as Professor Galloway's King of the Four Horseman.
[gdoc key="https://docs.google.com/spreadsheets/d/1LNRygMjOti7errtjSVPLUrU_Dj05m3bU1a1atbjF_2Q/edit" gid="410508477" chart="line" title="Return on Equity - Last 6 Years"]
While presentations such the one delivered by Professor Galloway at the DLD15 Conference help us understand what top technology thinkers are forecasting as the future prospects of dominant companies like The Four Horesmen - there is no substitute for seeing the data for yourself and making your own conclusions. Professor Galloway has a whole team of researchers working with him to gather all the data points used in his analysis of the technology industry. We have made it extremely accessible to access all kinds of financial data and ratios for every publicly traded company in the United States. This means you can draw your own conclusions on industries and sectors including their investment prospects. In addition, we created a valuation engine to help you understand the intrinsic value of these companies, so you know you are buying a company with positive investment prospects at a great price. Many times great stories are already baked into the stock price, leaving little room for error in the execution of the company's plan. We help you see the whole picture so that you can make a well informed investment decision.
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