Elephants Can Dance By Andrew McGuirk, analyst, Stansberry Innovations Report
A long-standing belief in business is that "elephants can't dance"... Historically, business theorists have argued that as companies gain size, they lose flexibility. They may struggle to innovate at the pace of smaller, more nimble competitors – or even their past selves. As a result, large companies tend to become complacent. Afraid to take risks and bogged down in decision-making, they lose their competitive advantage. This, in turn, opens the door for smaller innovators to disrupt markets. However, this traditional view might be out of date... Companies like Meta Platforms, Amazon, Microsoft, Apple, Alphabet, and Nvidia are prime examples. These days, many large businesses get to enjoy all the advantages of scale – without giving up innovation. We now live in an age of hyperscalers... thanks to the rise of the tech economy. And these innovators can leverage their vast resources to hold on to their competitive advantage. Today, I'll explain why this shift took place – starting with what these big companies gain by throwing their weight around...
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First, innovation requires massive amounts of resources for capital expenditures ("capex") and research and development (R&D). Today's largest companies have the financial muscle to allocate tens of billions of dollars per year to projects – a price tag that smaller firms simply can't afford. For example, Amazon's R&D spending exceeded $85 billion last year – more than the annual spending of 181 individual countries and territories. Similarly, Mark Zuckerberg said recently that Meta will spend nearly $100 billion this year. Around $40 billion of that will be dedicated to AI-related investments. Second, today's large companies also tend to benefit from economies of scale – where the costs per unit come down over time... Apple is a prime example. It has a lot of hardware to market and produce. Like many companies, it buys in bulk to take advantage of supplier discounts. But with Apple's massive sales volume, it can get a lot more bang for its buck... Apple can spread its high costs over millions of units. For example, a 30-second TV ad costs the same to Apple, whether it produces 1 million iPhones or 10 million. The more iPhones that Apple sells, the lower its costs per unit. Third, prominent companies have the clout to attract top-tier talent. Nvidia's dominance in the graphics processing unit ("GPU") market, for example, allows it to pick and choose the best engineers and scientists. Finally, large companies often have the financial means to acquire smaller businesses and build promising new technologies – like AI – into their existing operations. These market leaders have learned how to stay nimble. That's because we've seen a shift in the economic landscape... The new economy favors hyperscalers – another term for cloud-computing giants – and high-growth tech companies. Size doesn't hold them back... Instead, they've learned to harness their resources to drive continuous innovation and growth. They are investing billions of dollars into new projects with remarkable speed – which keeps them at the top of their industries. Amazon may be one of the best examples of this. Once a humble online bookstore, Amazon has grown into a global behemoth by innovating across various sectors. It can outspend competitors on R&D and infrastructure... And that means it can expand to dominate new markets – everything from e-commerce and cloud computing to AI and logistics. Today's hyperscalers – far from being the slow-moving behemoths of the past – have shown they can use their growth to stay relevant. They experiment... take risks... and push the boundaries of technology. It's time to update this old market adage. The economy has changed... And with the right strategy, the elephants can dance after all. Good investing, Andrew McGuirk Further Reading The hyperscalers are leading today's market – and they aren't going anywhere. But when it comes to AI, investors might find more profitable opportunities where no one is looking – in less obvious sectors that will benefit from this new trend... Learn more here. Some companies can take advantage of tough economic environments. They can even come out of recessions stronger than before. This idea is known as "antifragility" – and it's one key to finding the best, most successful companies in the market... Read more here. |
Market Notes HIGHS AND LOWS NEW HIGHS OF NOTE LAST WEEK Eli Lilly (LLY)... pharmaceuticals
Welltower (WELL)... health care REIT
T-Mobile (TMUS)... telecom
Barclays (BCS)... financial services
Royal Bank of Canada (RY)... financial services
Logitech (LOGI)... electronics
Corning (GLW)... smartphone glass
New York Times (NYT)... media
Texas Roadhouse (TXRH)... restaurants
Brinker International (EAT)... restaurants
Levi Strauss (LEVI)... jeans
Burlington Stores (BURL)... bargain retailer
Brink's (BCO)... vaults and security
Alcoa (AA)... aluminum
NextEra Energy (NEE)... utilities
CNX Resources (CNX)... oil and gas
Frontline (FRO)... oil tankers
Cameco (CCJ)... uranium NEW LOWS OF NOTE LAST WEEK Hertz Global (HTZ)... rental cars
Accenture (ACN)... digital consulting
Atlassian (TEAM)... collaboration software
Fastly (FSLY)... cloud computing
BlackLine (BL)... cloud-based accounting software
Coursera (COUR)... online education
Wendy's (WEN)... fast food
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