RID­ING FOR A FALL

The tril­lion-dol­lar giants that set alarm bells ring­ing

Sunday Times - - Careers - By MATTHEW LYNN

● 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.

Pic­ture: Getty Im­ages

Slow­ing sales in China have con­trib­uted to Ap­ple crash­ing in value.

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