When equity markets reach historic highs, talk generally turns to the most valuable companies on the planet (as measured by market capitalization or market cap). In June 2014, as global market capitalization – propelled by the surging U.S. stock market – exceeded $65 trillion for the first time in history, speculation about which company would be the first to get to the trillion-dollar level no longer seemed particularly far-fetched. Naysayers point to the avid interest in this subject as signs of unhealthy optimism and perhaps an impending market top.
However, it remains indisputable that getting in on the ground floor with a stock that over time goes on to become one of the most valuable in the world can work wonders for your portfolio returns and financial situation. While identifying such stocks is no easy task, your odds of success are greatly improved by adopting a long-term approach to investing – rather than short term or day trading – since trillion-dollar companies are not built overnight. Although a few obvious contenders are favored to win the race, some dark horses could potentially pip the front-runners to the post. Read on to learn who they are.
Putting a Trillion Dollars in Context
$1 trillion is quite a bit of coin. It amounts to 1.5% of the value of every public company traded around the world. Only 15 economies in the world had gross domestic product exceeding $1 trillion in 2012. A single company with a $1 trillion market cap would therefore be bigger than major economies such as Indonesia, Turkey, Saudi Arabia, Netherlands and Switzerland.
$500 billion is no trifling matter either. A company with a $500 billion market cap would be equal to the size of Norway – which was ranked No. 23 in terms of 2012 GDP – and would be larger than economies like Poland, Belgium, Argentina, Austria and South Africa.
The Most Valuable Companies – a Brief History
In the context of those mind-boggling numbers, it should come as no surprise that only a handful of companies have ever exceeded $500 billion in market capitalization, and of that select group, only one company briefly exceeded $1 trillion in market value.
Six U.S. companies have had market caps above $500 billion – Apple (Nasdaq:AAPL), Cisco Systems (Nasdaq:CSCO), ExxonMobil (NYSE:XOM), General Electric (NYSE:GE), Intel (Nasdaq:INTC) and Microsoft (Nasdaq:MSFT). Microsoft, Cisco and Intel topped that level between 1999 and 2000, when valuations for technology companies reached astronomical levels. General Electric also benefited from the booming U.S. economy to break the $500 billion barrier during that period. Microsoft was the biggest company by market cap for much of this time, as it briefly surpassed $600 billion in market value. The leadership baton was periodically passed to Cisco and Intel before the “tech wreck” crushed these stocks and put General Electric in the top position.
Apple is the most recent entrant to the $500 billion club, having done so in 2012. The stock entered a tumultuous phase after its market value peaked at more than $700 billion in September 2012, declining 40% by April 2013, before ascending steadily to regain the half-trillion summit a year later.
ExxonMobil’s market value topped $500 billion in late 2007 amid surging energy and commodity prices. It was during this energy boom that a relatively lesser-known entity – and a non-U.S. company at that – achieved the distinction of becoming the first-ever company to be valued at $1 trillion. PetroChina (PTR), China's biggest energy producer, achieved this feat on Nov. 5, 2007, when its shares almost tripled on the first day of trading following its IPO on the Shanghai exchange. But the stock could not stay at those lofty levels for long, and by June 2014, it had a market cap of less than $250 billion, which was still enough to make it the world's 15th-biggest company.
(Sources: Bloomberg, Company filings)
Notes - 1 Apple had a market cap of about $13 billion in June 2004, and did not rank among the world's Top 100 companies.
2 Google had its IPO in August 2004, and had a market cap of $35.5 billion in September 2004.
3 Royal Dutch Shell was formed by the merger of two companies in July 2005, when it had a market cap of $217 billion.
What Attributes Do the Global Giants Possess?
The above table lists the world’s 15 biggest companies by market cap (as of June 30, 2014). Browse through the list and it becomes apparent that they possess some common traits, such as:
- Brand recognition: Regardless of their core business – whether it is making coveted products, supplying innovative software, producing oil, curing diseases – these companies all have very strong brands that can be recognized worldwide. Apple, Microsoft, Google and GE rank among the world’s 10 most valuable brands, and Berkshire Hathaway’s biggest holdings are of star brands like Coca-Cola and American Express.
- Innovation: It goes without saying that these companies are all strong innovators; without innovation, they would have been unable to keep up the sustained growth required to climb into the top ranks.
- Longevity: Almost all of these 15 companies were among the world’s biggest 10 years ago in June 2004 (see their June ’04 rank in table). There were only three exceptions – Apple, which was a fraction of its current size in June 2004; Google, which had its IPO in August 2004; and Royal Dutch Shell, which was formed by the merger of its two parent companies in July 2005.
- Financial strength: These companies have strong balance sheets and the ability to churn out net income in the billions every quarter. In addition to consistently solid financial metrics like operating margins and return on equity, many of them also have mountains of cash, like Apple ($150 billion), Microsoft ($88 billion) and Google ($61 billion).
Conduct a random survey of people with some knowledge of the stock market, and ask them which company is most likely to be the next trillion-dollar titan. The most common responses will invariably be Apple and Google. That should not be too much of a surprise, since Apple was the world’s largest company as of June 2014, and Google ranked third (see table). But what is stunning is the remarkable speed of these two companies’ ascent to the top. In just a decade, Apple increased its market value by $547 billion, a 43-fold gain from a paltry market cap of about $13 billion in June 2004, representing a compound annual growth rate (CAGR) of about 45%. At that rate, $10,000 invested in Apple stock in June 2004 would have grown to $430,000 in a decade. (Check out Investopedia's nifty CAGR calculator.)
Apple was also tipped to be the first to regain the $1 trillion crown. In 2012, as Apple’s market cap exceeded $700 billion and the stock traded over $700 on seemingly insatiable demand for its iPhones and iPads, a number of analysts had price targets of $1,000 or more on the stock (note that Apple split 7-for-1 in June 2014), implying a market value of about $1 trillion if those price targets had been attained. Apple’s market cap of $560 billion as of June 2014 means that it would have to grow this by about 12% per year to reach the $1 trillion level in five years, or by about 6% annually over the next 10 years.
Google has been no slouch either, with its market cap up almost 11-fold within a decade. The company continues to rely on online advertising for the bulk of its revenues, but is spreading its tentacles into numerous business areas. Some of these initiatives – such as Google’s mobile Play store and Chromecast hardware – have begun contributing to revenue; other projects (Android, Chrome) have a huge presence and are well along the path to monetization; and others are long shots that may or may not pay off over time (Google Glass, driverless cars). But the slavish devotion to Google’s products by a generation that has grown up on its ubiquitous search, Gmail and YouTube could well ensure the company’s long-term success. Google’s $390 billion market cap would require about 21% growth over the next five years, or 10% annually over the next decade, to reach the $1 trillion level.
Sector and Country Contenders
Interestingly, despite the preponderance of energy companies in the ranks of the global giants (four of the Top 15) and the fact that the only company to ever breach the $1 trillion level was an energy producer, investors do not seem to be overly enthusiastic about the prospects for this group to grow at dazzling speeds well into the future. Nor do they seem to rate especially high the chances of former number ones like Microsoft and General Electric to attain their previous peaks. Banks and financial institutions are also given short shrift because regulators are unlikely to allow them to grow to gigantic proportions (remember “Too Big To Fail?”) after the travails of 2008.
Two sectors that seem to have higher odds than others of producing the next $1 trillion giant are technology (no surprise there) and biotechnology/health care. This is because successful companies in these sectors are capable of growing at dazzling speeds due to a virtuous circle – the billions they spend on R&D leads to developing blockbuster products with hefty profit margins, which swells their coffers and enables them to develop or acquire other promising technologies, and so on. Many of these companies also trade at premium valuations, as is evident from the significantly higher price/revenue multiple at which the technology and health-care companies trade (see table) compared with multiples for energy producers.
U.S. companies have an advantage in the race to $1 trillion since they have historically traded at better valuations than their overseas peers. But what about companies from other nations? The biggest companies from the BRIC economies either have much smaller market caps than their counterparts from developed nations (like India’s Tata Consultancy Services), or are inefficiently run state enterprises (Russia’s Gazprom). But two nations that may produce $1 trillion companies at some point may be China and Switzerland, partly because they have currencies that could continue to appreciate over the long term, boosting the market value of their companies in dollar terms. China also benefits from the staggering growth rates enjoyed by its best companies and the size of its economy, which will overtake the U.S. as the world’s largest in the near future. Switzerland has a number of multinationals like Nestle, Novartis and Roche that have strong product portfolios and have grown rapidly since 2004.
Challengers and Dark Horses
Some companies have expanded their market caps at such a frenetic pace in recent years that a trillion valuation some years into the future remains a possibility. Here are five companies that have grown at phenomenal rates in a decade or less:
- Facebook – Facebook’s market cap of $173 billion (as of June 30, 2014) gives it the No.33 rank in the world, which is no mean feat considering the company only went public in May 2012. With over a billion users, the company’s successful push into mobile advertising caused the stock to triple between June 2013 and June 2014.
- Amazon.com – Amazon’s $150 billion market cap represents a 580% increase over the previous decade. The world’s largest online retailer has expanded its initial offerings of books and music to a wide-ranging variety of products and services, and should continue to benefit from exponential growth in online shopping.
- Tencent Holdings – It may not be a household name in North America, but Asia’s largest Internet company has perhaps the most enviable growth record of the world’s largest companies. Tencent’s popular offerings of online games, apps, messaging services and advertising have enabled it to vault into the ranks of the world’s top-50 companies within a decade of its IPO in 2004. Its market cap has soared from $1.1 billion as of December 2004 to $142 billion by June 2014, a 130-fold increase.
- Gilead Sciences (Nasdaq:GILD) – Gilead’s $127 billion market cap represents a 700% increase from $15.7 billion in December 2004. The stock has surged on the success of groundbreaking therapies like its Sovaldi drug, whose efficacy in treating hepatitis C has some analysts believing that it could become the best-selling medication in history.
- Alibaba.com (BABA) – Although not yet public at the time of writing, Alibaba.com – which some have likened to a combination of Amazon, eBay and PayPal – could become the largest Internet company in China right off the bat once it has its IPO. Founded in 1999, Alibaba’s estimated $168 billion market value has grown fivefold within a few years.
In terms of dark horses, firms with disruptive technologies that achieve widespread adoption could be on their way to the big leagues in a matter of years. Former Paypal co-founder Elon Musk’s trio of companies - electric carmaker Tesla Motors, solar energy provider SolarCity and privately held spacecraft manufacturer SpaceX - are in the forefront in this regard, despite their modest market caps. Although Tesla's astounding success hogs the headlines, SpaceX is the ultimate dark horse. Imagine the implications if SpaceX succeeds in achieving Musk’s objective of making a fully reusable rocket that enables space travel to become commercially viable.
Obstacles to a $1 Trillion Valuation
A number of obstacles are in the race to reach a $1 trillion valuation. First and foremost, there’s the law of large numbers, which makes it difficult for the big to get even bigger. Then there are shareholders’ strident demands for companies to return cash to them in the form of buybacks and dividends. This return of capital to shareholders reduces the amount available to a company for R&D and acquisition. Then there are anti-trust concerns, which may prevent two large players from combining to create a bigger entity. Finally, there are valuation concerns – to wit: Does the upsurge of interest in the largest companies indicate a “seven-year itch,” given that technology company valuations peaked in 2000 and commodity/energy producers’ valuations reached records in 2007? In hindsight, will 2014 prove to have been the peak for tech/biotech valuations?
The Bottom Line
Identifying the next $1 trillion company necessitates a long-term approach to investing. While it is no easy task, the rewards that could accrue from successfully investing in the next trillion-dollar titan would be well worth the effort. Apple and Google may be the front-runners in the race to a $1 trillion, but challengers such as Facebook, Amazon.com and Gilead Sciences, as well as Chinese Internet giants like Tencent Holdings and Alibaba.com, are hot on their heels.
At the time of writing, Elvis Picardo did not hold positions in any of the securities mentioned in this article.