How Big is Too Big?

August 8, 2018 - John Osbon (3 mins to read)

Apple made headlines around the world last week when it crossed the $1 trillion dollar market value level. Apple’s value now begs the question, how much higher can it go? Is $2 trillion feasible? How about $4 trillion? Or has Apple grown so large it will begin to fade? Is the trillion dollar mark a limit or a launchpad?

No natural limit

A company worth one trillion dollars is hard to get your head around, but no more staggering than when companies like GE and Microsoft broke barriers like $100 billion and $500 billion. In fact, there is plenty of room for several one trillion dollar companies in the United States and more overseas. That’s because one trillion dollars is 3% of the value of all US stocks — very large, but not so large to dominate — or endanger — the entire economy.

Consider some of the market numbers ahead for investors. If the US market doubles in value in ten years to $74 trillion and Apple quadruples to $4 trillion, AAPL is still only 6% of the market. A company can claim 6% of the market because it is endlessly innovating, adding features, bringing out new products and taking big business risks. What if Apple becomes dominant in movies? It is investing $1 billion in original content this year. How about cars? With its cash hoard, Apple can buy the biggest US car company. It can buy a movie studio. Apple can create a cloud business, like Amazon or Microsoft.

Other candidates

If Apple can reach one trillion, who will be next? Obvious American candidates are Amazon, Alphabet, and Microsoft. Outside the US, Alibaba and Tencent from China are candidates, as are Tata in India and Royal Dutch Shell and Volkswagen in Europe. The market value of all stocks in the world is $81 trillion. If we have five one trillion dollar companies, they would comprise only a modest 6% of the world’s equity value. My point is simply that values are growing larger by the decade because economies, populations and profits are growing (not to mention inflation). A one trillion market value is no longer so unimaginable; it’s just where we are in the timeline of capitalism.

Apple shareholders can rest easy

Has Apple maxed out? Not likely. Patient long-term Apple shareholders can continue to get high returns as long as the company keeps innovating and growing. Apple could double and double again to 4 trillion in 14 years. That would imply a 10% per year growth rate, far below its historical rate yet quite good compared to the market as a whole. We can’t know where Apple and the economy as a whole will go in coming years, but there’s no obvious reason to believe Apple is done innovating and growing, or that government will step in and temper its prospects. Likewise, history tells us there will be some other company that takes over the lead in market cap someday. Dominance never lasts forever. Just ask US Steel or Exxon Mobil.

Keep investing

When we look at the reasons why companies get so big there is always a primary cause. The explanation might be ‘amazing products’ (Apple), ‘brilliant leadership’ (Berkshire Hathaway), ‘China’ (Tencent) or ‘stock buybacks’ (everyone, since stock buybacks will exceed one trillion this year).

Big number market capitalization numbers make for dramatic headlines in Apple’s case but don’t tell us anything about future returns. The one trillion mark only tells us there is plenty of room for many companies to reach that value or much higher. With a globally diversified equity portfolio, you increase your chances of owning the big winners.

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