How America’s Tech Giants Could Fall
The author, Morgan Stanley Investment Management’s chief global strategist, is the author of “The 10 Rules of Successful Countries”.
The global tech giants are so deeply rooted in the popular imagination that few can imagine a digital world ruled by any other name. But this assumption ignores how capitalism can quickly shrink the size of giants.
U.S. tech companies are among the top 10 in the world in terms of market value, and many commentators and investors believe there is no reason to question their continued advantage. Dozens of analysts are evaluating each of the top tech companies, and now Alphabet, Amazon, and Microsoft all have buying ratings. Apple and Facebook are also more widely supported than common stocks.
The traditional story is that these giants grow, become faster and more durable than their predecessors. As an Internet platform, they benefit from the “network effect”, gain in efficiency and dynamism as they acquire customers, and would never have been seen in “the history of capitalism. “.
Only we have seen a lot of this so far.
According to data going back to 1970, companies that ended their decade in the top 10 saw a median increase in revenue of about 330% during that decade, and their stocks were over 230% above the market. The top 10 of the 2010s were not much different from the norm. Income increased 350% and stock prices were 330% above the market.
At the end of the 2010s, the top 10 accounted for 16% of the global stock market value. This was similar to the share of the Top 10 in the 1970s and late 1990s.
Given the growing popularity of tech brands in the United States, it is largely forgotten that 10 years ago Amazon and Facebook were not among the top 100 companies in the world in terms of market value. But their tips are not uncommon. On average, companies that reach the top 10 will increase by about 75 places in 10 years and then decline.
Companies that finished 10 years in the world’s top 10 since 1970 had less than a fifth chance of finishing there in the next decade. Oil companies dominated the list in the 1970s, followed by Japanese banks in the 1980s. The technician’s name topped the list in the 1990s, but the cast continues to change.
Only two European tech companies, Deutsche Telekom and Nokia, fell into the top ten shortly after joining the club in the 1990s. Only one company, Microsoft, has reinvented itself enough to stay in the top 10 clubs for 30 years.
Explosive growth spikes are normal when capitalism works. Creative destruction too. Big business is getting uncomfortable. They talk about maintaining illusions, but in reality they do not touch the tastes of young people and do not give in to nimble rivals.
There are other threats. China shows how fast these days Regulatory attack You can knock Alibaba out of the world’s top 10 and defeat the corporate giant. Whether it is a forerunner of the potential of US tech giants, the risks posed by enthusiastic regulators are less pressing than capitalist competition.
The Internet itself is constantly evolving. The giants are start-ups competing to build the next internet platform capable of integrating elements of artificial intelligence and expansion or virtual reality. Facebook says “Metaverse,” The vision of the Internet as a 3D virtual space seamlessly connected to the physical world. However, to date, the most advanced prototypes of Metaverse exist on gaming platforms operated by new companies.
The major changes in the world market were triggered by central banks which raised interest rates to delay the overheating of the economy. Coincidentally, these changes diminish around the turn of the decade. The change, which seemed imminent in early 2020, was arguably delayed by a new wave of simple central bank funding to the stock market and a pandemic that inundated new customers for large-scale internet services. I am.
However, this grace can be transmitted. By the end of last year, revenue growth for global tech giants had started to slow relative to the rest of the world. In the past, weaker income growth was associated with lower relative returns in the top ten, most often leading to lower highs.
Within 10 years of hitting the top 10, you will find that profit growth typically drops 16% to 4% per year over the next 10 years. As profit growth declines, so does profitability and market attractiveness. After finishing in the top 10, giants typically see their profits turn negative and their relative performance drop by 70% over the next decade. Practically, they return to the top all the advantages that they have gained in their practice.
On average, the top 10 companies are down about 60 in the rankings over the next 10 years. This is a result that should not be deplored. Competition and churn are at the heart of a functioning capitalist system. As a result, the 10-year-old giants often bring such overwhelming benefits and diminish their popular imaginations over the next decade. Expect the pattern to repeat itself unless capitalism is truly broken.