With the exception of Yahoo (and eBay in 2007), big tech internet companies generated double-digit returns on invested capital every year since 2002. In our opinion, the impressive returns were driven by a combination of:
- Strong revenue growth: Online advertising grew at an average annual rate of 25.5% between 2002 and 2008, driving strong growth from internet companies with ad revenue streams. In addition, e-commerce grew at an average annual rate of about 20% during the same period.
- High Margins: With the exception of Yahoo, big tech operating profit margins are fairly high – ranging between 20% to 35%. Amazon’s operating profit margins are low (4.5%), but this is off of gross revenue, or total transaction value before commissions. We believe Amazon’s margins would look more like Google and eBay’s if taken off of net sales directly received through commissions.
- Low capital-raising requirements to fund growth: Growth by big tech companies has not required large capital raises or debt issuances. Google has had a few secondary offerings since it went public in 2004, but its phenomenal growth and margins has enabled it to maintain industry-high ROIC.
Stock performance has tracked ROIC for the most part. Here are stock returns for big tech from 2002 to 2008:
- Amazon: 870% since 2002
- eBay: 43% since 2002 (ROIC has lagged Amazon’s significantly)
- Google: 450% return since 2004 when the company was taken public.
- Yahoo: 60% return since 2002 (ROIC has significantly lagged Google’s)
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