Introduction
Have you ever wondered why some stocks keep going up, and yet there are many that make investors lose money over the long term?
Ever heard of the expression “You can’t go wrong with Blue Chip stocks?” Well it turns out that investing in Blue Chips can also go wrong. For example, check out the stock price of General Electric which has been on a long term downtrend since 2008.
Those familiar with Singapore stocks, a Blue Chip stock that went wrong is Creative Technologies that went south due to competition from Apple and abrupt changes in the music industry.
In this article, we will share a simple way to determine what makes Blue Chip stock continue to make new highs, instead of being at the peak with risks of being in a long term downtrend going forward.
Let’s Learn by using Meta as an Example!
The chart above illustrates the historical performance of Meta (Ex Facebook) since its IPO in 2013, which clearly shows that Meta is already up a whopping 993%!
Will it surprise you, if you were told this is the qualitative statistics of what most traders/investors think of after reviewing the chart above?
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Undecided – Meta is already up 993% since 2013 and despite it being famous, the reward to risk ratio of investing in Meta at current price probably doesn’t justify it. This is perhaps the most common mindset investors/traders have. The end result? No action.
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In reality, the population of investors that are long term bullish on Meta is very small, because it is against human behaviour to buy when prices are already high. Most people find it more logical to bargain buy when prices are low.
Out of the small population of bullish Meta investors, there are some that invest just based on their track record – but is that enough? Is there a better way of gaining more conviction in your long term investments?
In the next section, we will go into details, why it is possible to build more long term conviction for Meta!
Meta
End October, Mark Zuckerberg, the founder of Facebook officially announced that the company will be renamed to Meta and it will change its stock ticker from FB to MVRS effective 1st December 2021.
So what’s Zuckerberg up to? Apparently, this is what he passionately announced to justify the name change:
“We’ve gone from desktop to web to phones, from text to photos to video, but this isn’t the end of the line. We believe the metaverse will be the successor to the mobile Internet”. Over time, I hope our company will be seen as a metaverse company.”
The Metaverse is basically a digital world beyond what we currently know. It is a virtual world that humans in the physical world plug into (think Matrix movie) where people can meet and interact with one another.
Many do not realise it yet, but in hindsight, this is what Zuckerberg is envisaging – we are currently interacting and transacting goods, services and money in the physical world, and online payments are just a technologically efficient means of facilitating these transactions.
Now imagine an extension of this – visualise transcending from a physical world into a digital world, where that world is another economy and society all onto itself. In that virtual world, humans will socialise via their own avatars, perform work, interact, and do transactions akin to playing highly sophisticated games.
That virtual economy will bridge financially into our actual physical world.
What’s the potential?
Mark Zuckerberg has announced he plans to invest $10 billion in 2021 alone to develop his Meta platform, and expects that amount to increase going forward.
Facebook is currently just shy of a $1 trillion market cap valuation. Now imagine this, if Facebook is planning a long term pivot to build this Meta platform, that investment will likely run up to hundreds of billions eventually.
To build on that imagination – Mark Zuckerberg will clearly be expecting a return of investment isn’t it? Especially if that is going to kick start the creation and control of a new virtual economy.
If one visualises from this perspective, is there further upside for a $ 1 trillion market cap company that is potentially going to eventually invest hundreds of billions to create an entirely new market?
The best analogy to explain this, is just to reflect upon how Apple created the ‘Smartphone’ industry, revolutionised the App based mobile economy, and became the first company to reach a $1 trillion market cap!
So if Facebook were to revolutionise the Metaverse industry to create and dominate the virtual economy, what will that eventual valuation be? $50 trillion, or perhaps $100 trillion?
What supports this Vision?
For one, Meta has one the world’s largest users base through Whatsapp, Instagram and Meta itself. It is much easier to exploit this Network Effect of migrating its existing user base onto the Meta platform, dominate and eventually monetise that platform.
Second, Meta is already making inroads into the virtual world. Through Oculus, its virtual reality (VR) headset, it controls approximately 28% of the VR market via gaming, software development and hardware. It is only second to Sony who has market leadership.
Third, this virtual economy will likely not be anything the existing physical economy has seen, where governments and central banks have almost complete control via respective countries’ currencies. In the virtual economy, independent cryptocurrencies free from government intervention will likely flourish. In this regard, Meta has already made inroads in launching its own digital stablecoin called Diem.
Conclusion
In summary, there is a simple way to determine whether a Blue Chip can continue to rise – there must be a narrative for it to grow in the future.
Having a historical track record is useful, but not everything. The reason is because past performance is no guarantee of future performance.
However, the combination of historical quality track record + visionary upside narrative increases the likelihood a strong stock will only get stronger with time!
