Topic: has any large company succeded after running large deficits in the beginning?
Conclusion: hit me with your best examples of companies with backstories like Netflix and Amazon that today report very large profits (global top 100)
This morning as I and my girlfriend had our morning coffee, we started talking about the ebbs and flows of new economy companies. Sometimes it’s radio or railways. Sometimes it’s IT or biotech — have both been through four waves so far, or is it more?
Right now, companies like Netflix and Amazon are running extremely hard to monopolize their market. Investors are playing along, hoping for a combination of both high market share and high profit margins in the future, when the economies of scale and network effect moat is wide enough to effectively cement their position as well as profitability.
Just imagine when Amazon is the everything store and no other company can even start competing, since their cheapest source of intermediate goods isn’t from their ordinary suppliers but from Amazon itself! Or when Netflix has 2 billion subscribers and own all the writer and actor talent there is.
A few things ocurred to us:
- If these companies are doing it right, then what will happen to other companies — old school companies? Actually, the churn rate among public large caps has increased for several decades, which is a sign that with every passing decade old, large, “wonderful” companies are getting more and more vulnerable to new economy competitors. Apparently the process of new style co:s overtaking oldtimers is already well underway…
- Does that mean The Netflixes of the world warrant a high valuation, or the General Motors a low one. Or both? But what if even newer companies will overtake companies like Netflix even faster in the future, i.e., that the churn rate keeps increasing? What if “VR-nano-artibio-fy co” destroys Netflix the way Netflix killed Blockbuster? Then all current S&P 500 companies warrant lower valuations than in the past.
- What historical examples are there of companies investing heavily in the beginning, running large losses and negative cash flows, and actually subsequently could reap the rewards of high market shares and high profit margins? Which companies among the world’s top 100 nominal earners have a history of such audacious investments? I couldn’t find any at a quick glance.
- My take is that if you don’t reasonably quickly find a way to profit from your operations, you won’t be able to charge enough from your clients in the future either. Either you don’t succeed in securing a near monopoly, or you do. In the former case, competition prevents you from super profitability and in the latter regulation does.
Please comment with links, charts and tables if you have good examples of companies that make very large profits today and that have a history of running very large deficits in the beginning of their existence. If they aren’t among the 100 largest earners don’t bother, since what’s interesting is if Amazon and Netflix are charting new territory or if it has been done before in the last half century.