The world’s tech giants have become so deeply embedded in the popular imagination that few people can imagine a digital world led by other names. But this assumption overlooks how quickly capitalism can tailor giants.
American tech companies lead the top 10 in the world by market value, and many commentators and investors see no reason to question their continued dominance. Dozens of analysts rate each of the major technology companies, and each and every one of them has a buy rating on it alphabet, Amazon and Microsoft. Apple and Facebook are also more preferred than the typical stock.
The conventional narrative has it that these giants are getting bigger, faster, and more permanent than their predecessors. As Internet platforms, they benefit from “network effects”, increase efficiency and dynamism in customer acquisition and consolidate the economy at a speed that has never been seen “in the history of capitalism”.
But we’ve seen a lot of it before.
Data from 1970 shows that companies that finished a decade in the top 10 saw average earnings increases of about 330 percent over that decade, and their stocks outperformed the market by more than 230 percent. The 2010s top 10 didn’t deviate too much from the norm: earnings soared 350 percent and their stocks outperformed the market by 330 percent.
At the end of the 2010s, the top 10 made up 16 percent of global market value, similar to the top 10 stocks in the late 1970s and 1990s.
Global top 10
Given the popularity of US tech brands, it is widely forgotten that Amazon and Facebook were not among the top 100 global companies by market value a decade ago. But their meteoric rise is not unusual either. On average, companies that make the top 10 climb about 75 places in a decade to get there and then disappear.
Since 1970, companies that finish a decade in the global top 10 have had less than one in five chances of finishing the next decade there. Oil companies dominated the list in the 1970s, followed by Japanese banks in the 1980s. Tech names peaked in the 1990s, but the line-up is constantly changing.
Only two European technology companies Deutsche Telekom and Nokia, ever cracked the top 10, flashed into this club in the 1990s before quickly falling off. Only one company, Microsoft, has reinvented itself enough times to stay in the top 10 clubs for three decades.
Explosive growth spurts are normal when capitalism is working. Likewise creative destruction. Large companies are becoming unwieldy. They talk about staying paranoid, but they don’t really lose touch with young tastes and leave the ground to more nimble rivals.
There are other threats as well. Lately, China demonstrated how quickly a regulatory attack can topple corporate giants and push Alibaba, one of its own, out of the global top 10. Whether this is a harbinger of what could happen to US tech giants, the risk posed by eager regulators is less pressing than capitalist competition.
The internet itself is constantly evolving. Giants race against upstarts to build the next internet platform likely to incorporate elements of artificial intelligence and augmented or virtual reality. Facebook is trying to reinvent itself as the host of the “Metaverse”, a vision of the Internet as a 3D virtual space that is seamlessly connected to the physical world. To date, however, the most advanced prototypes of the metaverse exist on gaming platforms operated by newer companies.
The major shifts in world markets were triggered by central bank interest rate hikes to curb the overheating of economies; coincidentally, these shifts have fallen around the turn of every decade. The shift, which appeared to be imminent in early 2020, was arguably delayed by the pandemic that brought a new surge of easy money from central banks to the stock markets and a flurry of new customers for major internet services.
Declining earnings growth
However, that delay is likely to pass. At the end of last year, the earnings growth of the world’s tech giants had slowed compared to the rest of the world. Historically, slower earnings growth has been associated with weaker relative returns for the top 10 and a possible decline from the top for most.
In the decade after companies hit the top 10, they typically see earnings grow from 16 percent per year to 4 percent over the next 10 years. When earnings growth slows down, so does profitability and the attractiveness of the market. After a spot in the top 10, the giants usually see negative returns and their relative performance will shrink by 70 percent over the next decade. In fact, they give back any winnings they made in their run to the top.
On average, the top 10 companies in the rankings will drop by around 60 places over the next ten years – a result that should not be mourned. Competition and emigration are at the heart of a functioning capitalist system. This is why the giants of one decade so often deliver so overwhelming returns in the next and shrink the popular imagination. Expect this pattern to repeat itself unless capitalism is really broken.
Ruchir Sharma, Chief Global Strategist of Morgan Stanley Investment Management, is the author of The Ten Rules of Successive Nations
– Copyright The Financial Times Limited 2021