How Covid propelled trillion-dollar valuations

“A billion here, a billion there, and pretty soon you’re talking real money,” the late US Senator Everett Dirksen once said, mainly with reference to out-of-control federal spending in America. It was a snarky understatement to emphasise not just wasteful government spending, but also the 
value of a billion dollars, which, expressed numerically, is 1 followed by nine zeroes — as in, US $1,000,000,000. Although the world’s first billion-dollar company (US Steel) announced itself in 1901, and the world’s first billionaire (John Rockefeller of Standard Oil) was minted in 1916, even in the 1950s, when Dirksen was 
said to have made the comment, a billion was big, big bucks.

Today, a billion dollars — or even a million dollars for that matter — is still a lot of money for an individual. There are approximately 2,800 known billionaires — and many unknown — in the world, a list currently led by Tesla’s Elon Musk, with an estimated wealth of $280 billion. But in corporate terms, it is becoming chump change. Companies founded on a whim and prayer, or an app and hope, acquire valuation of a billion dollars in quick time, often based on speculative hope and hype. In an era of easy come-easy go, some endure, many do not. Dubbed Unicorns, a term first popularised by venture capitalist Aileen Lee after the mythical animal to represent the statistical rarity of such successful ventures, they have become a fairly common measure of entrepreneurial fizz.

In 2013, when the term was first used to describe startups that scaled up quickly to a billion dollars, there were less than 40 unicorns, mainly in the US. Today, there are an estimated 1,000 unicorns across the world, including 300 in China and 100 in India. Some 30 unicorns, including already-famous names such as SpaceX, Instacart, Stripe, and ByteDance, each valued between $10 billion and $100 billion, have been given the name Decacorn. Scaling further up, Decacorns become Hectocorns when they are valued at over $100 billion.

Up until this stage, Unicorns, Decacorns, and Hectocorns are startup companies that are private, venture-backed entities, recognised and evaluated for their potential for growth, and not on their financial performance. Riding on “get big fast” (GBF) strategies, also known as Blitzscaling, these startups try to expand at a high rate through large funding rounds and price cutting to gain an advantage on market share and overrun competitors as quickly as possible. In pursuit of this foothold or market share, many of them don’t make a dime in profit; instead, they burn money to get ahead.

Facebook was the first Decacorn and Hectocorn in history, crossing a $100 billion valuation before it went public (once they go public with an IPO, they no longer qualify for the informal -corn suffix). It was followed by China’s Alibaba. ByteDance, owners of the app TikTok, which is backed by investors such as Sequoia Capital China and Softbank Group among others, is a current Decacorn, valued at over $140 billion — more than the current market cap of storied companies such as AT&T and American Express.

Since Facebook became the first privately-held Decacorn-turned-Hectocorn, a $100 billion-plus privately-held company, an additional 84 Decacorns have been created. Not all have survived, with 33 of them losing their status for various reasons. This leaves 51 companies still straining at the leash to go public, whereupon they enter new terrain. They include names such as India’s Byju’s, currently valued at $21 billion, making it the world’s most valuable education technology startup, and China’s Yuanfudao, also an edtech startup valued at $15.5 billion.

While Unicorns and Decacorns grow through large funding rounds from private venture capital firms and investors to get an early foothold in the marketplace, sitting on top of the pyramid are companies that do go public and scale a stratospheric height of a trillion dollars — companies for which there is still no agreed upon term as yet. The name Pegasus has been suggested for such companies which reach the new valuation pinnacle of $1 trillion (like the unicorn, the pegasus is also a mythical horse, but with wind beneath its wings). Collectively, they are simply known as Big Tech. They are the T company.

The market cap of $ 1 trillion

A trillion is no trifling sum. For starters, it is 1 followed by 12 zeroes — as in $1,000,000,000,000. A trillion dollars is greater than the Gross Domestic Product (GDP) of all but a score of countries. It is greater than the GDP of Switzerland, Sweden and Argentina, each with GDP below one trillion dollars in nominal terms. For that matter, the valuation of Apple, which recently crossed $3 trillion (it has since dropped to about $ 2.65 trillion at the time of writing), nudged the GDP of Great Britain and India, two of the larger economies of the world.

Today, there are around half-a-dozen companies in the world that have a market cap of over $1 trillion. All but Saudi Aramco are US-born and US-based, and each has a tech orientation. As of March 31, 2022, they are led by Apple ($2.85 trillion), followed by Microsoft ($2.31 trillion), Alphabet/ Google ($1.84 trillion), Amazon ($1.65 trillion), and, the most recent addition to the list, Tesla ($1.1 trillion). Couple others have crossed the 1-T mark or nibbled at it and receded — notably PetroChina and Meta/Facebook.

The rise, rise, and rise of US tech companies has also led to growing concerns about ‘Big Tech’ — an analogous recall of market dominance by a few companies in other market sectors such as Big Oil and Big Pharma. For instance, the big five tech stocks, originally dubbed FAAMG (Facebook, Apple, Amazon, Microsoft, and Google) and now TAAMG (with Tesla replacing Facebook, which has lost nearly 30 per cent of its valuation), account for about a quarter of the market capitalisation of the entire 500 companies in Standard&Poor’s 500. This effectively means 1 per cent of the companies in the index account for about 25 per cent of the total market value.

Such market concentration isn’t unusual. In fact, some companies in the past represented an even bigger share of the market. Back in 1932, AT&T accounted for 13 per cent of total US stock market value, more than twice Apple’s approximately 6 per cent share of the current S&P value (about $ 40 trillion). Even further back, in 1928, General Motors represented 8 per cent of the market, and, in 1970, IBM 7 per cent. But there is a big difference in the time and pace of how the modern Big Tech became bellwethers.

While four of the five American companies hit the $1 trillion market cap before the pandemic, what is remarkable is that the onset of Covid-19 — which lowered the boom on many traditional legacy companies — powered Big Tech to even greater heights. For instance, Apple, which hit $1 trillion market cap on August 2, 2018, doubled that in just two years, going up to $2 trillion on August 19, 2020, in the middle of the pandemic. It took even less time to breach $3 trillion (on January 3, 2022) before receding slightly. Similarly, Microsoft went from breaching $1 trillion in June 2019 to surpassing $2 trillion in June 2021, and Google went from scaling 1-T in January 2020 to topping 2-T in November 2021.

So, what gives? How and why did this happen, particularly during a pandemic?

The pandemic and the online giants

To begin with, even in the pre-pandemic economy, four members of the Trillion Dollar Club (Tesla came late to the party) dominated their respective market: Apple in smartphones, Microsoft in cloud computing, Alphabet/Google in Internet advertising, and Amazon in online retail. When the pandemic kicked in, the stay- work- and buy-from-home economy brought rich rewards to these companies. While the already besieged brick-and-mortar companies collapsed, the online giants boomed, helped in addition by stimulus payments that put money in people’s pockets on top of low interest rates. Apple and Microsoft sales of IT products and cloud services soared, as did Amazon retailing and Google services, as people spent more and more time indoors and online. In many ways, the pandemic helped clarify a trend that was already becoming apparent before Covid-19 struck.

Rewind or flashback 25 years, and you will see that the top 10 companies in terms of market cap were a mix of oil, food, pharma, and technology, all valued between $100 million and $220 million. In 1997, the list of most valued companies in the world read General Electric, Royal Dutch, Microsoft, Exxon Mobil, Coca Cola, Intel, Nippon, Merck Toyota, and Novartis. Up until even a decade ago, five of the top ten publicly listed companies in terms of market cap were oil companies, with Exxon Mobil and PetroChina leading the way. There were only two tech companies in the list — Apple at #3 and Microsoft at #10. In fact, PetroChina, a Chinese oil and gas company, an arm of state-owned China National Petroleum Corporation, became the first company to roar past the $1 trillion mark in 2007, a decade before Apple rang up its first trillion in market cap.

In January 2007, just as PetroChina was nearing the $1 trillion valuation, Apple introduced its first iPhone, when the company was still shy of being $100 billion (it was worth $73.4 billion at that point). Introducing the iPhone, Apple founder Steve Jobs promised a “leapfrog product” that would be “way smarter than any mobile device has ever been, super easy to use”. As it turned out, not only did Apple reinvent the phone, it reinvented the market.

In the years to come, the iPhone would become one of history’s best-selling products, racking up (most recently) sales of more $200 billion annually within a decade. The device has now become so ubiquitous that television presenter Jason Silva, paraphrasing the philosopher Descartes, joked “iPhone, therefore I am”. Signs that the iPhone would power Apple to the top spot became clear as early as 2012, when it displaced ExxonMobil as the world’s most valuable company, with PetroChina slipping to third place.

The new-age ‘pinnacle’

In the decade since, Apple has never lost that pole position — except in 2019, when Microsoft briefly toppled it. Founded in 1974, just a few months before Apple by Jobs’ contemporary Bill Gates, Microsoft is another money-spinning behemoth, often ranked with Apple as one of the most profitable companies in the world. Just as Apple reinvented the phone, and itself, with the iPhone, Microsoft relaunched itself with cloud computing, the biggest revenue source for a company that was a byword for software. Relative to Apple and Microsoft, which are of mid-1970s vintage, Amazon and Facebook were founded in the 1990s; Tesla is even newer, founded only in 2003. But each has carved a niche in the market in its area, with rivals at a distant second.

By early this year, Big Tech had completely trumped traditional companies, with eight of the ten most valued companies in the world all belonging to the tech stable: Apple, Microsoft, Google /Alphabet, Amazon, and Tesla occupying top five positions, with Nvidia, Meta/Facebook, and TSMC in the 5-10 slot. The only exceptions were Berkshire Hathaway at #6 and United Health at #10.

So, are the T-companies really worth all that much, how much further can they — and will they — grow? What propelled them to such dizzy heights and will they survive? These are questions that haunt every market maven as the world teeters on the brink of the twin crisis of war and pestilence. The recent tumult over the hostile bid for Twitter, and the meltdown of Netflix stock, has raised new questions on valuation. But one thing looks certain, at least in our lifetime: the trillion-dollar pinnacle is the new summit large companies will aspire to climb.