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Going to the Moon…or at least $1,000,000,000,000
By: Joseph Scime, CFA, CFP®, Senior Consultant, The Wealth Office™ and
Ryan Tracy, CFP®, Consultant, The Wealth Office™
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| ”You know what’s cooler than a billion dollars? A trillion dollars.” paraphrases Sean Parker, Justin Timberlake’s character in the movie, The Social Network.
While the reference from the 2010 movie alluded to a then little known startup, Facebook, striving to become a billion dollar company (which it has now surpassed almost 500 times over), the sentiment around the chasm from one “illion” to the next still holds.
In 1901 United States Steel Corporation (U.S. Steel) became the first $1 billion dollar company, and it has taken over a century for the first publicly traded company to cross over into the next frontier to trillion dollar status.
So, in this day and age, what does it mean to be a trillion dollar company? Apple, Inc. (AAPL) and Amazon, Inc. (AMZN) are the first two companies to breach the threshold; (on August 2, and September 4, respectively) in terms of market capitalization defined as the number of all common outstanding shares of the stock multiplied by the current market value of those shares.
Up until now, the concept of a trillion dollars has been confined to how much debt the United States has accumulated - $21.4 trillion (and growing) as of the date of this publication.
One trillion sounds enormous. Let’s put that number into context and explain just how big one trillion dollars is:
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| • One trillion has thirteen digits
• If you divided one trillion dollars among each person in the United States, everyone would receive $3,076.001
• If you divided one trillion dollars among everyone in the world, each person would get a check for $131.002
• According to a 2017 valuation study by Forbes’, the combined value of every franchise in the NFL, MLB, NBA & NHL is just shy of $200 billion; which means you could buy every major professional sports team from all four major sports leagues five times over!3
• At $1 trillion, the market cap of Apple & Amazon is larger than the Gross Domestic Product (GDP) of 183 of the 199 countries the World Bank tracks GDP data. Below is GDP data for a few notable countries4
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| o United States: $19.391T
o China: $12.237T
o France: $2.582T
o Brazil: $2.055T
o Russia: $1.577T
o Mexico: $1.149T
o Turkey: $0.851T
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The figures above are extraordinary. However, the time it has taken Apple and Amazon to reach such a valuation is astonishing, because it demonstrates the constant evolution of technology and by association, change.
Apple’s initial public offering (IPO) occurred December 12, 1980 and Amazon’s on May 15th, 1997. To reach the trillion dollar valuation, they took 38 years and 21 years respectively. Remember, U.S. Steel became a billion dollar company back in 1901 and today only has a market cap of just over $5 billion, illustrating trillion dollar companies don’t just grow on trees.
Apparently, a garage is the best place to found a trillion dollar company, as was the case at Steve Job’s childhood home, when on April 1, 1976 Apple Computer Company was founded (with Apple Computer, Inc. formalized a year later in 1977); and Amazon, originally named “Cadabra, Inc.”, officially organized in Jeff Bezos’ rented home.
With Apple and Amazon seemingly on the verge of world domination (a little hyperbole never hurt anyone, right?) the question many investors ask themselves is: “Should I jump on the bandwagon now or has the proverbial “easy” money already been made with these two stocks?”
The chart below offers a cautionary tale of how the largest companies, defined by market cap rank in the S&P 500 Index, grab the top spot but don’t always stay there. It’s a reflection of the constant innovation, ingenuity and technological advances by companies around the world. Let’s not forget, before becoming a trillion dollar company, Apple was on the verge of bankruptcy in 1997 before being thrown a lifeline by Microsoft.
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| The chart above has a number of well-known companies that at one time or another were some of the largest in the world; but as you can see, that hasn't always been the case.
During the late 1970’s Schlumberger Ltd. and Chevron Corp. had their time in the sun following the oil crisis, but fell far behind their peers during the late 1990’s tech boom when companies including Cisco Systems and Sun Microsystems Inc. grew rapidly; topping charts in both returns and market cap.
Bellwethers, International Business Machines and General Electric, which had remained in the Top 10, in size, for decades, have recently been passed by more nimble and innovative companies that saw both drop in the S&P 500 to their smallest relative size ever. If it can happen to GE and IBM, Apple and Amazon may not be immune, as some research analysts might have you believe.
The novelty of Apple and Amazon topping the trillion dollar level feels like a significant achievement, but, the event also affords us an opportunity to remind investors that companies and sectors, much like asset classes, tend to move cyclically over time.
A prudent, well-diversified portfolio, whether in the context of individual stocks or globally diversified equity, real asset and fixed income exposure, can mitigate the inevitable ebbs and flows of cyclical trends in global markets.
Removing emotion from the equation and exploiting inevitable reversions to the mean is the best way for investors to follow the age-old adage, “Buy Low, Sell High”.
For more information, please contact any of the professionals at DiMeo Schneider & Associates, L.L.C.
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| 1www.bls.gov
2 www.bls.gov
3 https://www.forbes.com/sites/mikeozanian/2017/04/11/baseball-team-values-2017/#46b85fad2451
4 https://www.investopedia.com/news/apple-now-bigger-these-5-things/
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| While this article addresses generally held investment philosophies of DiMeo Schneider & Associates, L.L.C., it does not represent a specific investment recommendation for any individual client or prospective client. Please consult with your advisor, attorney and accountant, as appropriate, regarding specific advice. Information has been obtained from a variety of sources believed to be reliable but not independently verified. Past performance does not indicate future performance.
This report is intended for the exclusive use of clients or prospective clients of DiMeo Schneider & Associates, L.L.C. Content is privileged and confidential. Any dissemination or distribution is strictly prohibited.
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