RIDING FOR A FALL
The trillion-dollar giants that set alarm bells ringing
● Rewind six months, and it all looked very different. Apple was celebrating becoming the first company to break the $1-trillion (R13.8-trillion) market value barrier. Amazon was not far behind, confirming Jeff Bezos’s position as the richest man in the world. Google’s parent Alphabet didn’t look to be far off, and even Microsoft was getting close to that magic number. Amid the euphoria over the rise of tech giants, a trillion was starting to become the new normal.
And now? Apple has crashed in value, and so has Amazon. It looks like it will be a while before any company gets to those kinds of lofty valuations again. Why? When a stock is worth that much, it is time for investors to get out.
The race to become the first company worth a trillion dollars was an engaging subplot to the tech bull market that evaporated in a wave of selling at the close of last year.
In the end, the contest was won by Apple when, on August 2, its shares punched up to $207.05. It was followed by Amazon, which broke through on September 4, and for a while there it looked as if a whole group of trillion-dollar companies would follow.
The trouble is, it was always a huge valuation to put on one business that sells phones, and another that sells books and other stuff online. It is more than the GDP of 183 of the 199 countries for which the World Bank collects data. You had to have absolute faith in both companies to believe they were worth that much.
Actually, they weren’t. Apple’s share price
You had to have absolute faith in both companies to believe they were worth that much
has fallen from a peak of $230 in October to just $147 now, hit especially hard by stalled iPhone sales especially in the Chinese market. It is now worth just over $700bn. Amazon has fallen from $2,000 a share in September last year to $1,350 just before Christmas, and its value is down to $770bn, a long way short of the magic trillion mark.
Of course, there were specific factors behind those falls. As well as slowing sales in China, both Amazon and Apple have been hit by the wider sell-off in tech shares, as well as the downgrading of the entire equity market as global growth starts to cool, and the US Federal Reserve, at least until last week, seemed intent on pushing up interest rates.
It is starting to look like a trillion is the new sell signal — a sign that it is time for investors to get out of a company.
Here’s why: first, it almost inevitably means there is a bubble. In reality, no company can yet hit that kind of valuation without some degree of unjustified hype.
At Apple, investors assumed it could push up the prices of its models, persuading its customers to upgrade every couple of years, while also expanding into services such as music and film streaming. At Amazon, they were buying into Bezos’s vision of the “everything store” that could supply you with just about all you needed with a simple nod towards that Alexa device in the corner.
Next, it inevitably attracts competition. In a free market — and the internet remains a ferociously competitive arena — outsized profits get competed away quickly.
You can see that most clearly at Apple, where rival phone manufacturers have started making brilliant devices that sell for a lot less. Amazon doesn’t have a single competitor, apart arguably from China’s Alibaba. But it does have lots of smaller rivals.
Finally, as it becomes more and more dominant, a business faces an inevitable backlash. Politicians start complaining that it is abusing its market power, doesn’t pay enough tax, treats its workers unfairly. Both Apple and Amazon have faced a wave of complaints, from massive fines and tax demands from the EU to potential anti-trust regulation in the US.
On top of that, Wall Street analysts and the hedge funds start scrutinising business models for any flaws. There is some serious money to be made from shorting a $1-trillion company if you can identify what might go wrong. That inevitably makes life far harder.
A free market is very good at cutting oversized companies down to size.
One day a market value of more than a $1trillion might well be commonplace. For the moment, however, it is a signal that a company has become over-valued and is about to face more regulation and more competition — and that means it is time for investors to get out.