Tesla and Amazon have always been on my “too hard” pile to figure out as an investment. I commend what they are doing to innovate their industries, but I could never quite figure out how to reconcile their low net profits with their sky-high revenues. When you’re selling billions of dollars worth of goods, I expect you to make profits. Even Ford, a deep cyclical, is able to earn 5% net returns on each car it sells. If you spend $45,825 on a 2017 Ford F-150, I can appreciate that $2,291 will work its way to Dearborn, Michigan in the form of net earnings that the Board of Directors and management team can allocate as they wish.
Check out the nine and a half minute mark of this charmingly clunky video from Peter Lynch. It contains the following quote:
“McDonald’s earnings have gone up, I think, more than 80 fold over the last thirty years. The stock has gone up 100 fold. What made McDonald’s earnings continue to grow? If they had just stuck with a cheap cheeseburger and a cheap hamburger at lunch, they probably would have run into earnings problems ten, fifteen years ago. But they expanded their menu, they kept their costs low, they added breakfast, they went overseas. Every day, they add two or three more restaurants. People thought there was no room for more McDonalds’ five, ten, fifteen years ago. They were wrong. If they had done the research that said, well, there’s a couple hundred countries out there. There’s lots of places to grow.”