The biggest challenge for me right now is maintaining a strict valuation discipline, with a focus on individual companies and margin of safety, while attempting to filter out the deluge of broader, often contradictory noise.
There are some counter-arguments to the 'margins are too high argument'
1) Taxes. The recent tax changes make the net margins higher. Unless you expect the U.S. Congress to change course, this margin gain won't mean revert.
2) Interest payments. American companies are less leveraged today than in the past. This means higher net margins. Higher rates should compress net margins, but it'll take time, because a signifcant amount of them have fixed rate debt.
3) Mix change. Now companies like Apple, Microsoft and Google are way more of the profits and they are higher margin.
4) Financial sector margin expansion. This is a matter of accounting (provisions, higher capital requirements, etc) and I think they should be studied apart.
The S&P 500 ex-financials margins increased just by a bit: 12.5% operating margins in 2011 to 14% in 2021. The non-tech sector reduced operating margins between 2011 and 2021.
I look forward to hear your views and I enjoy your work, keep it up!
Hi Matheus, thanks for the comments and for reading. Those are all great points and I can see the argument for why higher margin levels may be sustainable.
On (1), Hussman seems to think that "little variability" in profit margins can be attributed to taxes (https://twitter.com/hussmanjp/status/1549461859325157384) but this is beyond my ability to fully understand or comment on.
(3) is the most compelling argument to me, but even among the tech companies I wonder if 2021 levels of profitability are sustainable. GOOGL, MSFT and AAPL all had significantly higher profit margins in 2021 than they have had in recent history - how much of this was just due to the tailwinds of COVID? There are some early signs (i.e. hiring freezes, layoffs) that things may be slowing down.
GOOGL, MSFT and AMZN are also increasingly competing in the same industries for growth (Azure, AWS, GCP) and I also wonder what the effects of longer term, direct competition on margins will be. With that said, they are all great companies, and it's hard to see what erodes the profitability of their core businesses (i.e. Google search). They have consistently defied my expectations.
There are some counter-arguments to the 'margins are too high argument'
1) Taxes. The recent tax changes make the net margins higher. Unless you expect the U.S. Congress to change course, this margin gain won't mean revert.
2) Interest payments. American companies are less leveraged today than in the past. This means higher net margins. Higher rates should compress net margins, but it'll take time, because a signifcant amount of them have fixed rate debt.
3) Mix change. Now companies like Apple, Microsoft and Google are way more of the profits and they are higher margin.
4) Financial sector margin expansion. This is a matter of accounting (provisions, higher capital requirements, etc) and I think they should be studied apart.
The S&P 500 ex-financials margins increased just by a bit: 12.5% operating margins in 2011 to 14% in 2021. The non-tech sector reduced operating margins between 2011 and 2021.
I look forward to hear your views and I enjoy your work, keep it up!
Hi Matheus, thanks for the comments and for reading. Those are all great points and I can see the argument for why higher margin levels may be sustainable.
On (1), Hussman seems to think that "little variability" in profit margins can be attributed to taxes (https://twitter.com/hussmanjp/status/1549461859325157384) but this is beyond my ability to fully understand or comment on.
(3) is the most compelling argument to me, but even among the tech companies I wonder if 2021 levels of profitability are sustainable. GOOGL, MSFT and AAPL all had significantly higher profit margins in 2021 than they have had in recent history - how much of this was just due to the tailwinds of COVID? There are some early signs (i.e. hiring freezes, layoffs) that things may be slowing down.
GOOGL, MSFT and AMZN are also increasingly competing in the same industries for growth (Azure, AWS, GCP) and I also wonder what the effects of longer term, direct competition on margins will be. With that said, they are all great companies, and it's hard to see what erodes the profitability of their core businesses (i.e. Google search). They have consistently defied my expectations.