The huge market value is not an obstacle to future growth.
At the end of last month, Facebook achieved its most significant achievement so far: its market value reached $1 trillion. Only five U.S. listed companies have a market capitalization that has reached the $1 trillion mark, accounting for 0.08% of the total number of companies listed on the New York Stock Exchange and Nasdaq. This is roughly equivalent to the odds of a high school basketball player entering the National Basketball Association. This is an elite club.
Since Facebook (FB) has already obtained club access (although its market value dropped slightly to $980 billion on July 8), we may have to wait a while before we can see the next entrant. This is partly because the federal government wants to control large corporations, but also because club members who currently have trillions of dollars in assets have a natural incentive to keep their clubs small.
There is a huge gap between the market value of the next candidate to become a member and the entry barrier, which we call the trillion dollar cliff. Among U.S. listed companies, Tesla (TSLA) followed closely with a market capitalization of US$629 billion, followed by Berkshire Hathaway (BRK.A), Alibaba Group (BABA), and Taiwan Semiconductor Manufacturing Company (TSM). And Visa(V).
We in “Barron’s Weekly” pay close attention to all these stocks. In the past few weeks, I have been discussing with my colleagues who the next company may exceed one trillion US dollars in market value. I also consulted sources and surveyed the readers of the Barron’s Review & Preview daily news briefing.
Several names are often mentioned: Tesla (TSLA), Nvidia (NVDA), Visa (V) and JPMorgan Chase (JPM), all of which have a market value of at least US$400 billion. It is not obvious that Shopify (SHOP) is mentioned, the company’s market value ranking is relatively low, with a market value of only $182 billion. Shopify has become a member of the anti-Amazon alliance, providing simple e-commerce tools for brick-and-mortar suppliers and other businesses. While Amazon (AMZN) is trying to resist regulation and possible splits, Shopify can keep a low profile and continue to recruit new businesses.
I would bet that Visa is the next company to reach $1 trillion, even if it will take a while. The company is closely related to economic recovery because it can get a share of the transactions through its global electronic payment network.
Visa’s business is partly technology and partly financial services. With the decline in global cash usage, this business has been smooth. In the past ten years, the annualized return on Visa stock was 28%. If this model continues, by 2024, the scale of Visa will reach $1 trillion.
Although who is the next trillion-dollar company is obviously a guessing game, one thing is clear: a huge market value is not an obstacle to future growth. Since Apple (AAPL) became the first U.S. listed company with a market capitalization of US$1 trillion in August 2018, its annualized rate of return has reached 44%. The stock hit a record high on July 7, with a market value of US$2.4 trillion.
Who is the next trillion market capitalization company?
Note: Only U.S. listed stocks
Time: July 8, 2021
I asked Denise Chisholm, Fidelity’s industry strategist, whether the so-called law of large numbers would work. She said: “In any case, size is not particularly predictive. The S&P Information Technology Index now accounts for more than 20% of the S&P’s overall index. Does this have any meaning for the sector or industry to outperform the broader market in the future? the answer is negative.”
Now, the members of the trillion-dollar market capitalization club are gaining momentum. “Moving objects tend to stay in motion,” she said.
The secret of technology companies is to continuously expand their profit margins, and their valuations are basically in line with historical standards. According to data from Yardeni Research, the operating profit margin of the information technology industry in the S&P 500 has doubled in the past 15 years, and recently reached 21%, while the overall profit margin of the S&P 500 has remained at about 10% (excluding The plunge during the financial crisis).
The magic of technology — and those trillion-dollar market capitalization club passes — are now under increasing regulation. Jim Paulsen, chief investment officer of The Leuthold Group, said: “The headline news that Facebook joins the trillion-dollar market capitalization club will bring more regulation.”
On July 9, the Biden administration signed an executive order calling for “the entire government to work hard to promote competition in the American economy.” The order is composed of 72 initiatives, which are broad and narrow. It hinders the integration between giants and also solves consumer pain points, such as early termination fees for broadband services, difficult-to-repair consumer equipment fees, and airline luggage fees.
So far, the Biden administration has realized that technology regulation is not easy for the public. A Pew Research poll in 2020 showed that although people are uncomfortable with technology-related data and privacy practices, less than half of American adults support strengthening technology supervision.
Privacy regulation is politically complicated, especially if it means controlling advertisements that make services such as social media, Internet search, and email free. But there is not much controversy about restricting broadband charges or making smartphone batteries easier to repair. The White House appears to be attacking the company’s sore spots—its record on customer service is mixed.
At present, investors still generally ignore regulation. After Biden issued an executive order, the share prices of the five members of the “Trillion Dollar Market Value Club” on July 9 either rose or remained flat.
Ed Yardeni, president of Yardeni Research, said that now is the time to take regulation more seriously. “Here is a trillion-dollar company and there is a trillion-dollar company. This has attracted the attention of many politicians.”
(This article is for readers’ reference only, and does not constitute providing or relying on as investment, accounting, legal or tax advice.)
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