$1tn is just the start: why tech giants could double their market valuations

Alphabet, the tech giant formerly known as Google, on Thursday night became the fourth company in history to reach a trillion-dollar (£776bn) valuation. In less than 24 hours, some analysts were predicting that the company, founded in a messy Silicon Valley garage 21 years ago, could double in value again to become a $2tn firm “in the near future”.

The consensus among Wall Street bankers is nothing can stop the runaway share price rises of Alphabet or the other so-called “Faang” tech companies. Facebook, Amazon, Apple, Netflix and Google have seen their combined market value increase by $1.3tn over the past year – thats the equivalent of adding half the value of all the companies in the FTSE 100, or the entire GDP of Mexico.

“It‘s such a phenomenally large number that it’s difficult for most of us even to quantify the value,” said Paul Lee, the global head of technology research at Deloitte. “Even if you describe it like being the same amount as the economy of a big country, its still difficult to get your head around the number.”

Lee said that even though it has been more than 20 years since the first Google search was made, aspects of the technology are still in their relative infancy. For example, nearly all searches are currently based on words, but searches based on image and video could be far faster, and more accurate.

“At the moment, self-service checkouts are still relatively primitive: you have to scan the barcode of each product, one by one,” he said. But using new machine vision technology based on cameras in the ceiling, the store will be able to ‘see’ youve picked up a certain box of cereal and charge you for it immediately, and you can just walk out of the store without having to stop by a checkout.

“Thats just one form of forthcoming automation that will revolutionise our lives in the future, and improve productivity.”

Lee said the tech companies were expected to monetise the vast amount of data they hold on their billions of users to revolutionise almost every aspect of our lives, from travel and healthcare to financial services and shopping.

“You almost cant live your life without googling things,” said Michael Lippert, a portfolio manager at Baron Capital who holds Alphabet among his biggest investments. “Google is one of those critical, important leaders in multiple areas,” he told the Wall Street Journal.

Brian White, an analyst with boutique brokerage firm Monness, Crespi, Hardt & Co, said he expected Alphabet to continue to grow in size and value despite forthcoming breach-of-privacy and antitrust investigations by the US Congress, 50 state attorneys general and the Department of Justice.

“Although we expect the antitrust rhetoric to reach deafening levels ahead of the US presidential election this year, we are not afraid of a potential breakup of Alphabet,” he told CNBC.

“We continue to believe Alphabet is undervalued for its growth prospects, leadership position in digital advertising and cash-rich balance sheet.”

Apple, Microsoft and Amazon have all been part of the trillion-dollar club, although Amazon has slipped below $1tn again in recent months. Apple became the first company to hit a trillion in August 2018, and in the 17 months since it has increased in value by 38%, taking it to $1.38tn – roughly six times as valuable as Royal Dutch Shell, the UKs biggest company.

The “Faang” concept has mutated several times since it was first introduced, as “Fang”, by the CNBC television presenter Jim Cramer in 2013. Then it stood for four high-performing tech stocks: Facebook, Amazon, Netflix and Google (which became part of a specially created conglomerate, Alphabet, in 2015).

A second A was added to include Apple, and then an M was added, creating “Famangs”, to allow for the addition of Microsoft, which joined the trillion-dollar club in April 2019 and is now worth $1.27tn. The New York Stock Exchange then created a “Fang”+ index that also includes Twitter, Tesla and Chinas tech giants Alibaba and Baidu.

The Financial Times last week declared the 2010s to have been “the decade of the Fangs”, and said that most experts predicted the tech companies to “continue to reign in the coming decade”.

Amazon, which has turned its chief executive and founder, Jeff Bezos, into the world‘s richest man, first reached the trillion-dollar milestone in the summer of 2018. The company’s value is now hovering around $930bn.

Facebook, whose shares have risen by 50% in the past year, is closing on the landmark with a valuation of $632bn.

Shares in almost all the companies have soared in recent weeks, as the market expects them to report strong figures when they release their full-year financial earnings, starting with Netflix on Tuesday. Alphabet‘s figures will be released on 3 February. The five largest companies – Apple, Microsoft, Alphabet, Amazon and Facebook – now make up 19% of the S&P 500 index of America’s biggest companies. The fast-growing dominance of tech is highlighted by the fact that in 2015 the five largest companies made up just 12% of the index.

“In the past year, the aggregate market capitalisation of Facebook, Amazon, Apple, Netflix and Googles parent Alphabet has gone up by 45%, or almost $1.3tn, even as combined consensus earnings estimates for 2019 and 2020 have fallen by 7% and 8%, or $10.7bn and $9.6bn respectively,” said Russ Mould, investment director at stockbroker AJ Bell.

This combination of soaring share prices and sliding earnings means that the Faangs as a group have been hugely re-rated, from 21 times earnings for 2020 to nearly 30 times now.

“At the moment, investors are being very forgiving in the view that new product or services releases will fire earnings growth; customers are being more tolerant of data use than regulators; and those investments will pay off in the long term by opening new markets or boosting returns from the existing one.”

Dan Morgan, a senior portfolio manager who focuses on tech companies at Synovus Trust, said Alphabet, led by Sundar Pichai, had “really been a cash cow”.

“Theyve been steadily continuing to post 15% to 20% growth, which is pretty amazing when you consider how mature that model is.”

Christopher Rossbach, the chief investment officer of Knightsbridge-based investment manager J Stern & Co, which helps advise ultra-high-net-worth families, reckons that Alphabet could double its market value despite the threat it is facing of intense scrutiny from politicians and regulators across the world.

“As Alphabet joins Apple, Microsoft and (from time to time) Amazon among tech companies that have reached this level, it marks just the start for the company,” he said. “It still has significant further room to grow, both in its core online advertising business and as it innovates in advertising monetisation and formats, and in its cloud computing business.”

Rossbach said that despite the 27% increase in Alphabets share price in the past 12 months, the stock was still “at a very attractive valuation”.

“Alphabet is laying the foundations for a much larger company as it is the unequivocal leader in artificial intelligence and machine learning,” he said.

“Alphabet can be a $2tn company in the near future and is a compelling opportunity for long-term investors.”