Outside of the US, the only other company with a thirteen-digit value is Saudi Aramco , which trades on the Saudi Stock Exchange. What gives these companies their outsized valuations?
One theory highlights a unique trait they all share: low operating costs. According to renowned economist Ronald Coase’s 1937 article The Nature of the Firm, keeping a company’s internal operating costs to a minimum is the key to success.
Coase had originally been making the argument for why people form corporate structures as opposed to conducting business in a free market. He pointed out that these external operating costs are higher in a free market, whereas within a company these extra costs are absorbed.
“As long as their internal transaction costs are lower than external transaction costs for the same project, the company has an economic advantage versus the contractor, which in turn fuels the company’s success and growth,” Eric Feng, co-founder of video-shopping startup Packagd (now owned by Facebook), wrote in Medium on the subject of the rise of such companies.
“As long as their internal transaction costs are lower than external transaction costs for the same project, the company has an economic advantage versus the contractor, which in turn fuels the company’s success and growth” - Eric Feng, co-founder of Packagd
That’s just part of the story, though. While savvy corporate management has helped these capitalist icons keep healthy balance sheets, how profits are distributed among businesses has shifted.
According to The New York Times, today half of the profits produced by all publicly traded companies are collected by just 30 businesses compared to 109 in 1975.
Top of the pile
A giant among giants, Apple became the founding member of the trillion-dollar club back in 2018 and, despite losing and regaining the title more than once, today remains the most valuable company in the US.
Up until recently, it has predominantly been a product company — its flagship products account for 75% of its total sales. However, CEO Tim Cook has realised that if the company wants to continue to grow in value, it needs to grow the services and wearable segments of its business.
Amazon and Microsoft have since joined the club due to their commitment to services and their cloud computing segments. Advertising has also been key to Amazon’s growth.
As is the nature of the stock market, a company’s market capitalisation can fluctuate wildly. Google’s parent company Alphabet [GOOGL] has entered the Trillion Dollar Club four times this year, most recently on 6 February, before dropping out again 18 days later.
It shouldn’t come as a surprise if Alphabet joins the club again in the near future. Following its earnings report on 29 April, shares popped. Despite missing EPS estimates, investors were relieved to see that quarterly revenue wasn’t as bad as had been feared. Alphabet’s value jumped nearly 9% in one day, giving the company a valuation of $917.8bn.
The company did, however, acknowledge that advertising (its biggest segment) experienced a slowdown in March, as companies cut their ad spending in response to the coronavirus pandemic. If this continues throughout the second quarter, Alphabet’s value could fall back in the middle of the year.
Who’s next to join the club? One obvious name to throw into the ring is Facebook [FB]. As of 22 May, the company’s market cap stood at $670.1bn.
While it’s certainly some way off the trillion-dollar mark the company’s stock price did rise 59% in 2019. To put this into context with the other tech giants, the price of Microsoft rose 58% in the last calendar year, while Amazon’s stock increased by just over 37% during the same period.
Payment processing company Visa [V] could also be a shoo-in. The company sits comfortably in the top 10 highest market caps and, although its 29 April valuation came in at $402.83bn, its value did increase by around 44.6% in 2019.
Rise of Visa's valuation in 2019
If the company can maintain this pace, it will be on track to hit the 13-digit mark at some point in 2022 — or perhaps, taking into account the impact of COVID-19 later still.
Another name is Warren Buffett’s Berkshire Hathaway [BRK-A]. Its growth rate may not be as attractive as the tech giants — its share price rose by 10.9% in calendar 2019 — but analysts agree that it’s not a question whether the firm will join the trillion-dollar club, but when.
According to Jason Ware, chief investment officer at the Albion Financial Group, Berkshire Hathaway will “likely hit $1trn eventually, but they are the tortoise in this story”.