What the Train Boom in 1830-1850 can teach us about the Tech Sector? 🚂 🖥 📱

Do you know about the 🚂 development in 1830-1860 and how investors became irrational?

I wonder if we were to apply the modern vernacular to markets of the past, what the description might have been of the growth in Railways in the 1840s?

No-one though made much money… in fact those that bought into that opportunity in the 1840s were by and large wiped out…

That seduction of that ‘new economy’, or booming ‘disruptive technology’ opportunity proved to be a chimaera for those who chose to invest, and the lesson was that you might be able to identify genuinely society changing technology shifts, but actually profiting from this is exceedingly difficult.

We are only a short distance historically from the TMT “bubble” – named that post the event of course.

Leaping back again those 175 years it is worth thinking about economic conditions at the time…

Let’s take a small step back. The logic of investing in the current Technology revolution in part is based on the premise that markets learn, that we are somehow scarred by the TMT debacle, and that muscle memory dictates we ‘won’t make the same mistakes again’.

Railway Share Prices in Britain from 1830 to 1850

Railway Investment in the United Kingdom 1830 to 1850

So much for muscle memory.

There is no doubt, as then, that we are in the centre of a “Data” or “Knowledge” Revolution, one that can perhaps echo the changes in the Victorian era wrought by Industrialisation.

Now some of you might be looking at the second chart above and could rightly suggest that many of the companies exposed to the “Knowledge Revolution” are significantly less capital intensive than railways, and that is of course a fair point.

I don’t want to get too far into the ‘FANG’ debate hear, as each of the components will have their own characteristics but here I’d just like to pose a question using Amazon as an example.

• Market Capitalisation : $500 bn
• EBIT (Operational Income) 2017 : $ 5 bn

If I am not to be a fool and want to own Amazon say for the next ten years, and remember the company has an avowed intention not to pay dividends currently, what kind of share price appreciation might I be expecting per annum.

OK so far ?….

Now let’s take the debate one step forward from there, if 10 years from now Amazon is “mature” what P&L might you need to fill $1 trn of market cap… $100bn gives you EV/EBIT of 10x, $50bn EV/EBIT of 20x…. somewhere between the two?… so a 10 to 20 fold increase in profitability should be achieved by Amazon to have a “mature valuation”.

Actually the problem is more profound than that, if the thesis is to work, it kind of assumes that the profit pool is not shared with others.

At the moment the debt cost of capital is negligible, and via the share price the implied equity cost of capital is also low.

The market reacts to the Wholefoods acquisition for $14bn

One day though…

Even if I know that I may be shaking my head with incredulity for a while, it ends and the cascade of valuations that sit underneath the ‘FANG’ (Facebook, Amazon, Netflix and Google) style stocks will be equally vulnerable.

Has anyone asked what the incremental value of all this collected data actually is for example?

One last point. There is a perception that new technologies completely supplant the old. Actually the 19th Century Railway analogy gives us another window on today.

You would have thought that the advent of Railways marked the death knell for horses, in fact the reverse was true. They were of course the delivery vans of yesteryear for that ‘last mile’ and demand increased ..…

*Other Post you might enjoy: Morality in Silicon Valley

Source Images: 1; 2; 3