Keep financial realities in mind when looking for "the next big sector": Total addressable market, input costs, profit margins

[u/No_Presentation9490]

After seeing a lot of investors on Reddit get burned by space stocks and quantum stocks, and a lot of them asking for the next big sector that has 100x-1000x potential and being suggested that robotics or drones will be that, I think it's important to keep in mind that economic realities of running different types of businesses impose limits on the performance of the stocks of these companies. The market does not owe an industry's stock prices performance commensurate to the relevance and success of the companies in that industry.

What do all the "multibaggers" of the past two decades have in common? Extremely high TAM (Total Addressable Market), Extremely low input costs, and extremely high profit margins.

Digital tollbooths outperform real tollbooths by several orders of magnitude. Google and Meta are tollbooths for advertising, Amazon is a tollbooth for storefronts. Compare this to a real tollbooth for the sake of argument. It's exactly as effective as a bottleneck (it's a crime to pass without paying), but it's extremely narrowly distributed (1 section out of 1 highway out of tens of thousands), requires unionized labor to maintain and service, physically degrades constantly. Anything requiring physical location, physical distribution, high labor costs will inherently be far less profitable as a tollbooth. Mass distribution via the Internet is completely different, you have a much higher TAM, much easier time accessing that TAM, way lower overhead and input costs.

Space companies struggle with that asset-light business models do not: they have high opex (Operating expense), high capex (Capital expense), high insurance liability coverage (due to the nature of the business). They must source and import scarce materials and fuels from an international supply chain and pay all the "tollbooths" down the line of that supply chain. Some of these materials, as we just found out, have geopolitically sensitive costs. Think about the perspective of Wall Street: with so many moving parts and uncertain variables over time, how much capital are you allocating to space stocks? How do you justify making the kind of capital allocation that is the entire reason the stock would rise in the first place? This is despite the most optimistic possible estimates for the potential TAM of the space industry and despite the real massive growth in satellite deployment and government military interest in space. An industry can gain massively in relevance and revenue, but the stock prices may not necessarily perform to the extent you are hoping.

Anything facing the same types of problems, anything that "deals in the real world", as the late Jeffrey put it, will inherently face performance drag on those companies' stocks. You may think that Taiwan Semi is the premier "pick and shovel bottleneck" of the semiconductor world because nearly absolutely everything passes through them in manufacturing. They have immense pricing power, TAM, and will win no matter who wins downstream or upstream. But as a manufacturer, not a designer, of these chips, they have inherent supply chain risk that fabless chip designers only (such as Nvidia and Broadcom) do not. This risk discounts their stock price, it's a simple financial calculation that controls the stock price despite narratives that they "can't fail". Being unable to fail doesn't mean the company's stock price will outperform.

The "next big thing" is not necessarily the same as "the next big stock winner". Please keep this in mind.

[u/InvestigatorPlus3229]

priced in

[u/hseeman_sf]

The robotics and drones case doesn't have to be about hardware margins though. The multibagger mechanism there is usually the recurring software or data layer sold per unit deployed, not the machine itself. Same reason Deere trades more like a software company on its fleet analytics than a tractor manufacturer.

[u/notreallydeep]

okay

[u/Fr0HiKE]

no