History isn’t a guide

Dan was a history major in college and he often mentions how brief stock market “history” is compared to actual history. The point being, it’s essentially all new, so something unprecedented happens all the time. 

Here’s one such unprecedented occurrence–we now have several companies that are worth more than $1 trillion. This is new and different, with all such examples having occurred after 2013.

Back in 2012, Apple was valued at more than 650B (for a few days), and it was considered impossible for a company to reach a trillion-dollar scale. People thought a company simply couldn’t keep growing once it got to that size. Apple continued to grow despite this widely held view. Its revenue and profits are each about 2.4x greater than they were in 2012.

But it’s more than just Apple—today, we have a handful of multi-trillion-dollar market capitalization companies and an obsession over how “narrow” the market is when led by these few behemoths. The thinking goes: narrow markets are weak under the surface. When there are just a few big winners, that makes for an unsustainable situation that occurs just before a major decline. That’s what stock market historians have been warning about for the last several years. 

But that “history” never contained a trillion-dollar company, let alone several of them, and it’s important to understand what has changed to allow such a proliferation of mega-capitalization companies. We just had an election, so I’ll refashion a famous quip:

“It’s the Internet, stupid.”

The Internet has enabled distribution at scale and at practically zero cost, which is a complete break with the past. Consider the following in light of US population (330 million) and World population (8 billion):

• Google has about 1 billion daily active users. 
• Apple’s customers have 2.2 billion active devices. 
• Facebook has 3 billion monthly active users. 

The Internet connects more people than was ever possible, creating larger markets for goods and services than what we’ve seen historically. That’s why these companies have been able to grow for longer than expected. 

Today’s large companies aren’t only bigger than the largest companies of the past, they’re more profitable and have more opportunities for future growth. A trillion-dollar market cap isn’t a speed limit that can’t be surpassed. It’s standard for exceptional businesses.

 

Best regards,

Evan McGoff

 

P.S. Market Capitalization is the total number of shares outstanding multiplied by the current price per share. It’s essentially the market value of the entire company.

Disclosure: Dock Street Asset Management, Inc. and/or our clients may own Apple (AAPL), Google (GOOG), and Facebook (META). This article is not intended to be used as investment advice.