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nice article from Damodaran in latest FAJ on "The Big Market Delusion." takeaways are:
* "big markets" (big TAMs) attract intense competition & overconfident funders who don't make clear how competition will be managed
* this is a cyclical recurrence (me: not low rates/tHE fED)
* "big markets" (big TAMs) attract intense competition & overconfident funders who don't make clear how competition will be managed
* this is a cyclical recurrence (me: not low rates/tHE fED)
in it, the GOAT presents 3 case studies: e-commerce, online ads, cannabis and finds 4 commonalities:
* huge TAM as part of story -- adds $UBER's $6T TAM (lol) as example
* downplay of competition
* growth > profitability
* pricing disconnect from fundamentals
* huge TAM as part of story -- adds $UBER's $6T TAM (lol) as example
* downplay of competition
* growth > profitability
* pricing disconnect from fundamentals
the GOAT claims three ingredients needed for the Delusion:
1. Existence of big market (real or perceived)
2. Overconfidence on the part of mgmt/investors
3. Unrealistic pricing of equities
1. Existence of big market (real or perceived)
2. Overconfidence on the part of mgmt/investors
3. Unrealistic pricing of equities
Companies pursuing "big markets" typically don't reach peak of success due to some Porter's Five Forces-type stuff:
1. Difficulty capturing sufficient share
2. Lacking ability to generate profits
3. Inability to keep new entrants out
1. Difficulty capturing sufficient share
2. Lacking ability to generate profits
3. Inability to keep new entrants out
"although rev gwth in aggregate may confirm mkt is big, rev gwth @ firms collectively will fall below expectations and op margins will be < expected b/c each individual firm overestimated its own prospects"
fun/interesting example from the online ads category. took 2005 revenues and imputed 2025 revenues implied by valn's (assuming op margins and cost of capital etc). conclusion was online ad revs implied in public mkts alone $522B against reasonable assumption of $466B in totality
