The race for US$2 trillion ($3t) is on. Alphabet, the parent of Google, is poised to scale the US$1t market capitalisation number any day now. Its shares are already up 7 per cent in 2020 and 34 per cent since the start of 2019. It would be the fourth company to hit the trillion dollar milestone after Apple, Microsoft and Amazon. But their products, business models and threats differ. So do their chances of doubling their equity market values.
At the beginning of 2015, the consensus five-year earnings per share growth for Alphabet was 18 per cent. That figure today has dropped to 15 per cent. But even as that growth rate moderated, Alphabet's valuation has exploded. Its forward price-to-earnings ratio is now a whopping 28 times, compared with just 18 times a half decade ago.
Still, that 50 per cent hike is lower than the jump for Apple and Microsoft. Apple's current multiple of 23 times lags behind the bunch but is up 64 per cent. Both figures are astounding for a hardware maker prone to product cycles.
Google continues to dominate internet search even as the marketplace has shifted to mobile advertising. The Alphabet structure was created to separate that core business from other "moonshots", such as autonomous vehicles unit Waymo. They may yet prosper, though their hype, for now, exceeds anything in the way of financial returns.
Microsoft is the dark-horse contender whose steady performance and relatively dull software business have dazzled investors. It is valued at nearly 30 times earnings despite a lower expected earnings growth rate than Google. Its shares have outperformed Google sharply in the past five years.
But if the US$2t figure is going to be reached solely thanks to growth potential, then Amazon is the answer. It starts at a disadvantage, with a market value that has fallen closer to US$900 billion than US$1t. Yet its projected five-year earnings growth rate is still 30 per cent.
The risks for all are equally formidable. Antitrust enforcers may finally step up and demand the break-up of these companies — or at least force changes in their business models. Moreover, the business may themselves choose to separate their parts.
Finally, steep valuations may be held back by market saturation. Trees do not go on growing until they touch the sky.
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