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The writer, Morgan Stanley Investment Management’s leading global strategist, is the author of “The Ten Rules of Successful Nations.”
The tech giants of the world have become so deeply ingrained in the popular imagination that few people can imagine a digital world led by other names. But this assumption overlooks the speed with which capitalism can reduce the size of giants.
U.S. technology companies lead the top ten in the world in terms of market value, and many commentators and investors see no reason to question its continuity. Dozens of analysts value each of the big tech companies and each of them currently has a buy rating on Alphabet, Amazon and Microsoft. Apple and Facebook are also more favored than typical stocks.
The conventional narrative is that these giants are getting bigger, faster, and more durable than their predecessors. As Internet platforms, they benefit from “network effects,” increasing efficiency and momentum as they gain customers and consolidate their takeover of the economy at a speed, it has been said, never before. “in the history of capitalism.”
We’ve only seen a lot of this before.
Data dating back to 1970 show that firms that finished a decade in the top ten recorded median gains of about 330% over that decade, and their shares outperformed the market by more than 230%. The first ten years of the 2010s were not so different from the norm: profits rose 350% and their shares outperformed the market by 330%.
By the end of the 2010s, the top 10 accounted for 16 percent of world stock market value, which was similar to the share of the top ten in the late 1970s and 1990s.
Given the popularity of American tech brands, it’s hard to forget that ten years ago Amazon and Facebook weren’t among the top 100 companies in the world by market value. However, its meteoric rise is not so unusual either. On average, companies that rank in the top ten increase by about 75 places over a decade to get there and then fade away.
Since 1970, companies that finished a decade in the world’s top 10 have had less than one in five chances of finishing the next decade. Oil companies ruled the list in the 1970s, followed by Japanese banks in the 1980s. The names of the techniques reached their peak in the 1990s, but the cast continues to change.
Only two European technology companies, Deutsche Telekom and Nokia, have ever reached the top 10 positions, joining this club during the 1990s before falling rapidly. Only one company, Microsoft, has reinvented itself often enough to stay in the club’s top 10 for three decades.
Explosive growth spurts are normal when capitalism works. So is creative destruction. Big companies get tough. They talk about staying paranoid, but they don’t really fall out of touch with young tastes and give way to more agile rivals.
There are other threats as well. Lately, China has demonstrated how quickly a regulatory attack can bring down corporate giants, making Alibaba, one of its own, out of the world’s top 10. Whether or not this is a harbinger of what might fall on the American tech giants, the risk posed by zealous regulators is less urgent than capitalist competition.
The Internet itself is constantly evolving. The giants are competing in advance to build the next Internet platform, which will likely incorporate elements of artificial intelligence and virtual or augmented reality. Facebook is trying to reinvent itself as a host of the “metaverse,” a vision of the Internet as a 3D virtual space perfectly connected to the physical world. Today, however, the most advanced metaverse prototypes exist on gaming platforms, managed by newer companies.
Major changes in world markets have been brought about by rising central bank rates to curb the overheating of economies; by chance, these changes have fallen near the end of each decade. The change that seemed imminent in early 2020 could be delayed by the pandemic, which sparked a new wave of easy money from central banks and into stock markets, and a flood of new customers for major Internet services.
However, this recovery is likely to happen. By the end of last year, the profit growth of the world’s tech giants had begun to slow, relative to the rest of the world. In the past, slower profit growth has been associated with lower relative returns than the top ten and, for the most part, a possible fall from the top.
In the decade after companies reach the top 10, they typically see profit growth fall over the next 10 years, from 16% annually to 4%. As profit growth slows down, so does market profitability and attractiveness. After finishing in the top ten, giants often see yields turn negative and their relative yields shrink by 70% over the next decade. In fact, they return to the top all the gains made in their career.
On average, the top ten companies shrink over the next decade to around 60 places in the ranking, a result that should not be regretted. Competition and confusion are at the heart of a functioning capitalist system. That is why the giants of a decade so often offer such disappointing performances in the next and shrink in the popular imagination. Expect this pattern to repeat itself unless capitalism really breaks down.