The tech sector is dominated by a few superstars.
“FAANG” stocks they’re called – an acronym used for five high-performing tech companies: Facebook, Amazon, Apple, Netflix, Google (Google has become Alphabet since the term was first coined).
The importance of FAANG stocks to the market is evident. The market tends to follow these stocks wherever they go. If FAANGs go up, the Nasdaq goes up. The opposite is also true.
FAANG stocks have carried the Nasdaq for a while. Their success was the index’s success.
But when Facebook and Netflix published disappointing second quarter results, their stocks fell and dragged the tech-heavy Nasdaq market down with them.
Now that Facebook and Netflix have run into trouble, it’s up to Triple A – Amazon, Apple, Alphabet – to come to the rescue.
The Triple A companies are the three stocks closest to a trillion-dollar valuation. After beating market expectations, Apple looks like it’s going to become the first trillionaire.
But what happens after that? With Amazon and Alphabet not far behind, will the iPhone company still be the biggest in five years’ time?
The race to $1 trillion
Apple ($935bn), Amazon ($866bn), and Alphabet ($846bn) are racing to become the first company to breach the $1 trillion mark.
The three tech stocks have broken away from the pack.
Not just because they are the three most valuable companies in the world, but because they continue to show extraordinary growth despite their dizzying value.
It’s very unusual for companies with such a high valuation to perform like smaller stocks, making big gains, and even doubling in value within a few years’ time.
Given how popular they remain with investors in spite of their market price, there’s little doubt we’ll see the first trillion dollar company soon. Possibly even this year.
We probably would have seen the first 13-digit company by now if it wasn’t for two things: dividends and stock buybacks.
“All else being equal, every dollar a company spends on shareholder dividends or stock buybacks cuts a firm’s market cap by a buck,” writes Kevin Kingsbury in the Wall Street Journal.
Let’s use Apple as an example why a company’s market capitalisation (how much it is worth) goes down when it pays dividends or buys its own stock.
Apple paid out $67.2 billion of its profits to its shareholders up to the first quarter of 2018. Because Apple has $67.2bn less to invest, its market cap could theoretically fall by the same amount.
Apple also bought $201 billion of its own stock by Q1 2018. When a company buys up its own shares, these shares are no longer available on the market. The result is that Apple can raise less money from investors.
So Apple spent $268.2 billion on dividends and stock buybacks. If you add that money to its current market cap of $935 billion, then Apple would already be a trillion dollar company.
Even so, Apple still looks destined to reach a trillion dollar valuation soon (unless there’s a big market crash).
With three new iPhone releases scheduled for later this year, I wouldn’t be surprised if it achieves that milestone by the end of 2018.
Will Apple still reign in five years?
Apple is on pole position to become the first trillion dollar company.
But looking beyond the race of who will cross that mark first, a more interesting question might be which company will have the biggest market cap in five years’ time.
Amazon is breathing down Apple’s neck, with Alphabet in its slipstream.
All three of them have their pros and cons, which makes it harder to predict which stock will be king five years from now.
Apple takes care of its shareholders, which is a definite plus.
“The prestige of being the first to a trillion dollars aside, shareholders usually prefer cash – and dividend-payers typically outperform nonpayers,” says Kingsbury.
But Apple’s main challenge remains that it still relies heavily on one product. About 60% of its revenue comes from iPhones.
What happens if that market gets saturated, or consumers decide there’s a limit to what they want to pay for a phone?
Amazon far exceeded market expectations as it reported $2.5bn in net income in the last quarter. To put this into perspective, the first time Amazon earned $1bn in quarterly profit was the last quarter of 2017.
It has its fingers in many pies and this diversification could help it surge past Apple in the future.
But it doesn’t have a reputation for paying dividends yet. With a CEO who is always looking to conquer a new market, investors have had to be patient.
The biggest threat to its future, though, is anti-trust regulation. Amazon has now become so dominant that there’s a real chance of regulators stepping in and breaking up the company.
Finally, there’s Alphabet. It, too, beat market expectations for Q2, pushing the stock up some more. Even a record $5bn fine by the European Commission didn’t faze the company or investors.
A problem is that Alphabet is even more reliant on a single revenue stream than Apple. About 90% of its income comes from advertising.
The Google company is even stingier than Amazon when it comes to paying dividends as the company famously hasn’t paid a single dime in dividends. Ever.
And then there’s the authority problem. Two record fines are a signal that governments have its activities under a microscope.
Whichever company ends up on top is anyone’s guess. But at least one thing may be clear: it’s no coincidence the biggest companies in the world are all tech companies.
As my US colleague Aaron Gentzler puts it: “The world runs on tech, and will run on more tech tomorrow.”
Even with share prices north of $1,000 and market caps of nearly $1 trillion, the Triple A companies look like high-growth stocks.