The Price of Oil. A Demand Story?

Dear Reader,


The price of oil hovers around 54.50 USD for West Texas Intermediate Crude Oil and 58.53 USD for Brent oil.

Is oil undervalued? Yes. I think world energy demand, even though economic growth is slowing, supports prices of around 70 USD for WTI and 75 USD for North Sea Brent oil.

Many people will point to the high supply of oil coming mainly from America, Russia and Saudi Arabia. Yes, oil supply is plentiful, but OPEC + Russia recently agreed to extent oil supply cuts.

I think the major factor that supports higher prices for oil is world demand. The price of oil reached 140 USD in 2008 and the world economy is considerably bigger than in 2008. Yes, oil supply has increased, but the current oil prices look too depressed for my liking.

The demand for oil is inelastic, because oil is used for transportation of necessity goods like bread, water, potatoes, rice etc. without which people simply cannot exist. What is more, people will need to travel to work, for leisure and so on. So even if the oil price abruptly rises, there will still be demand for oil. Oil demand is not exogenous. The price influences demand and supply influences demand.

The main beneficiaries from a higher oil price will be the major oil corporations like Exxon Mobil, Chevron, BP, Shell, Total, Gazprom, Lukoil and hydraulic fracturing oil producing companies like Marathon Oil Corporation, Anadarko Petroleum, Chesapeake Energy Corporation and so on.

Russian oil companies like Gazprom and Lukoil, especially, are quite undervalued. Petroleo Brasileiro is another oil major that should benefit handsomely from higher oil prices.

Disclaimer: The blogposts and comments on this blog and posts on social networks(Twitter, LinkedIn etc.) are not investment recommendation, are provided solely for informational purposes, and do not constitute an offer or solicitation to buy or sell any securities. The opinions expressed in the blogpost and posts on social networks(Twitter, LinkedIn etc.) are the author's and they in no way express the opinion or official position of the company where I am working currently!

Petar Vladimirov Posledovich is not liable for any investment losses incurred by reading and interpreting blogposts on this blog and posts on social networks.

Conflicts of interest: I may possess some of the securities, currencies or their derivatives mentioned in the blogpost and posts on social networks(Twitter, LinkedIn etc.)!

Respectfully yours,

Petar Posledovich

Amazon, Microsoft and Cloud Computing!

Dear Reader,


Amazon and Microsoft are at the forefront of the cloud computing revolution. Their lofty valuations measured by Price/Earnings, Price/Sales and Price/Book Value ratios reflect mainly the expectations for growth of cloud computing priced in by market participants.

Will Amazon and Microsoft deliver? So far, both Amazon and Microsoft are doing very well. Their cloud computing revenue is growing by more than 20% year on year which makes them internet stars in terms of growth. The current value of the Software As A Service(SAAS) cloud computing market is estimated somewhere at 90 billion USD a year. The SAAS market is expected to reach 250 billion USD in 10 years. If Amazon and Microsoft keep their current market share of 30% and 15% respectively this would give them 80 billion and 40 billion in cloud computing revenue in 10 years. The cloud computing market is characterized by very high growth margins. If both Microsoft and Amazon make let's say 33% net profit margin on cloud computing this would give them net yearly profits of circa 26.7 billion USD and 13.3 billion USD respectively in 10 years. So if we apply a reasonable technology Price/Earnings multiple of 20 this would value Amazon and Microsoft's cloud computing businesses at 526 billion USD and 266 billion USD in 10 years.

Apparently the stock market is extrapolating those future values at today's market capitalizations of both Amazon and Microsoft. Currently the above calculations represent about 55% of Amazon's and 37% of Microsoft's stock market capitalization.

Will both Amazon and Microsoft grow into these valuations. I would say that Microsoft has a higher chance of living up to current market expectations. Microsoft has the Microsoft Office advantage. Microsoft Office is gradually moving to the cloud with Microsoft 365, which provides a complementary cloud computing service which enhances Microsoft's SAAS cloud computing business.

Amazon would have more difficulty living up to the current hype. Competition is growing, so Amazon will have difficulty retaining its current 30% market share of the SAAS cloud computing market. What is more, Amazon's main business of internet shopping is notoriously not very profitable.

But, as things stand, for both Amazon and Microsoft the market seems to be pricing 10 years of brisk future growth now. Much like the market did for Microsoft stock in 1999. For 16 years after 1999 investment in Microsoft's stock almost did not make any money excluding dividends. The market was adjusting to the apparent overpricing of Microsoft.

Disclaimer: The blogposts and comments on this blog and posts on social networks(Twitter, LinkedIn etc.) are not investment recommendation, are provided solely for informational purposes, and do not constitute an offer or solicitation to buy or sell any securities. The opinions expressed in the blogpost and posts on social networks(Twitter, LinkedIn etc.) are the author's and they in no way express the opinion or official position of the company where I am working currently!

Petar Vladimirov Posledovich is not liable for any investment losses incurred by reading and interpreting blogposts on this blog and posts on social networks.

Conflicts of interest: I may possess some of the securities, currencies or their derivatives mentioned in the blogpost and posts on social networks(Twitter, LinkedIn etc.)!

Respectfully yours,

Petar Posledovich