For Big Gains, Break Up Big Tech Stocks: AMZN, FB, GOOGL

Do you want to make big money from technology stocks?

I mean really big money?

Then write to your congressperson and senators and tell them to support current congressional efforts to break up big technology companies.

No, I havent been smoking any funny stuff.

Yes, I know that Americas biggest tech companies have seen a collective gain of over 5,000% since the great financial crisis.

But history proves that once companies get as big as an Amazon, a Facebook or a Google, their best growth days are behind them.

It also proves that much, much better future gains can be had by letting the individual pieces of these megacompanies operate on their own, free from the logic of conglomeration. Heres why

Most people use the price-to-earnings (P/E) ratio to evaluate a companys valuation.

But P/E is static. It tells us how much youre paying for each dollar of earnings over the last 12 months.

What you really want to know is how fast those earnings are growing relative to the companys valuation.

All else being equal, you always want to buy companies whose earnings are growing faster relative to their valuations than others.

To assess that, we use the PEG ratio.

PEG is a stocks P/E ratio divided by its earnings growth rate. Because the growth rate is the denominator in the ratio, the lower the PEG, the better.

Here are statistics for four companies currently in congressional crosshairs:

Amazon is the only one whose projected PEG ratio wont decline significantly from last year. The other three experienced much faster price growth than their projected earnings growth.

The problem is that investors have front-loaded future earnings so much that the rate of growth of these big boys must slow in the coming years.

Of course, these companies could grow their share prices by innovating as they have done in the past. But thats unlikely.

There are two main reasons other than increasing attention from competition authorities why big companies inevitably produce ever-smaller shareholder gains as time goes by.

Who knows how much money the shareholders of an independent WhatsApp, Waze or AWS would have earned over the last few years?

One indication comes from eBays spinoff of PayPal. Since their breakup in 2015, the price of PayPal has increased by nearly 650%. EBay shares are only up about 150%.

Thats not to say every potential unbundling could produce the same lopsided results.

But I, for one, would love to see what would happen if a captive business unit like AWS or YouTube were free to innovate and create shareholder value as their leaders saw fit.

Kind regards,

Ted BaumanEditor, The Bauman Letter

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For Big Gains, Break Up Big Tech Stocks: AMZN, FB, GOOGL