On Thursday, Google-parent Alphabet became the fourth U.S. firm to achieve a market value of more than $1 trillion. Alphabet joins Apple, Amazon and Microsoft as the only American companies to have attained this distinction. In brief, these tech giants along with Facebook are overshadowing the stock market, representing close to 20% of the S&P 500 valuation.
Silicon Valley companies have ascended to the vanguard of the global economy. Furthermore, they are not sitting on their laurels. They are diversifying into new areas such as health care and transportation.
A significant drop of their outsized valuations might represent a threat to the overall stock market. Mike Wilson, Chief U.S. Equity Strategist and Chief Investment Officer for Morgan Stanley, pointed out that “a ratio like this is unprecedented including during the tech bubble. Capital concentration is following corporate inequality like never before.” The dot-com bubble witnessed a 75% decline of most internet stocks.
These companies possess pizazz because they have improving sales in a world environment where there is tepid economic growth and low interest rates.
Passive investing has buttressed their market value. That is, as more money pours into exchange-traded funds, these conduits invest their inflows based on the capital of existing companies. Therefore, those companies with the biggest capitalization receive a high percentage of the ETF inflows.
The multiple on these stocks seems pricey. Alphabet and Microsoft shares trade at 31 times the companies’ last 12 months’ earnings. Apple trades at 26 times earnings. This compares to the S&P 500 that trades at 22 times.
In 2017, Jonathan Taplin wrote an article that remains applicable. Giant tech companies have recently dominated the world economy. In 2000, only Microsoft achieved the status of being among the biggest companies in the world as measured by market capitalization. Currently, Apple, Alphabet, Amazon, Microsoft and Facebook are dominant.
Kai-Fu Lee, who developed the world’s first speaker-independent, continuous speech recognition system, made the following prognosis: “Artificial Intelligence is an industry in which strength begets strength: The more data you have, the better your product; the better your product, the more data you can collect; the more data you can collect, the more talent you can attract; the more talent you can attract, the better your product.” In brief, the stock of these companies can decline, but not necessarily their impact in the marketplace.
Over the past decade, Google, Facebook and Amazon have altered the landscape for much of the creative economy — journalists, musicians, authors and filmmakers. These tech behemoths leveraged their artificial intelligence capability to alter the transportation, medicine and retail industries. For example self-driving cars (a technology that both Google and Apple are developing) could eliminate as many as 300,000 jobs a year in the next two decades.
Big Tech companies are using their capital to make acquisitions and/or form joint ventures. Amazon acquired Whole Foods. Alphabet’s Verily is producing a range of medical devices, from glucose-monitoring contact lenses for diabetics to robotic surgery systems. Alphabet’s autonomous-car division, Waymo, has started a joint venture with Avis to manage their forthcoming self-driving car fleet.
We need to temper our enthusiasm with the expression “This too shall pass.” While these companies seem to be on the top of the mountain, their rise could also be temporary. In recent years, Exxon, IBM, General Motors, Cisco and General Electric have all enjoyed the largest capitalization. When I attended the University of Michigan (1966-68), the Big Three controlled 90% of the U.S. auto market. IBM was the Wall Street darling during the 1970’s. Under legendary Jack Welch, General Electric enjoyed the largest capitalization. If history is any guide, new companies using new technology will surpass the current leaders.
Originally published in the Sarasota Herald-Tribune
