Multiple US companies have now bounded through the previously unpenetrated US$1 trillion market-capitalization ceiling. In our view, the size of these ‘mega-cap’ companies could make future growth more difficult to come by compared to their midsize counterparts. The select group is now made up of four companies — Microsoft, Apple, Amazon, and Google — with an average market cap for the group of US$1.4 trillion. It sounds like a big number, but how much is a trillion dollars?
- US$1 trillion in US$100 bills stacked together would reach 631 miles high. Most commercial airplanes fly at six miles and the International Space Station orbits at 200 miles above Earth.
- There are about a trillion dollars currently in circulation in the US.
- The average elementary school teacher’s salary in the US is US$58,230. With approximately two million elementary school teachers, US$1 trillion would cover their salaries for about nine years.1
The future beyond the trillion-dollar ceiling
Although one trillion is already a large market-cap milestone, for investors to continue to make high returns from here, the numbers need to get even bigger.
Consider an illustrative example company2 using the average of the four mega-cap companies: let’s call it ‘BigCo.’ BigCo currently earns about US$34 billion annually based on analysts’ forecasts for 2020 net income.3 For BigCo to generate a 10% pre-tax cash-flow return from here for its investors, it needs to distribute US$143 billion annually into perpetuity, starting from today. That represents more than 3x the company’s current profits. Importantly, that required distribution compounds by 10% a year for every year that goes by without paying it. In other words, seven years from now, assuming no dividends during that period, the distribution number will exceed US$300 billion — or almost 10x current profits.4
This simple analysis implies our big four mega-cap companies would each need to earn US$25 – US$50 in net profits for every adult on the planet, every year.5
This is the first time we’ve seen companies of this scale in history. The degree of difficulty in becoming and then continuing to grow a mega-cap company may be evidenced by this rarity of occurrence.
Smaller numbers are just easier to compound
Just as there is a big difference between a billion seconds (32 years) and a trillion seconds (32,000 years), the challenge of growing a mega-cap company (versus a midsize one) is significantly greater.
For example, one can imagine running a midsize company and being tasked with redeploying tens or even hundreds of millions of dollars annually into areas with reasonable returns on capital. In contrast, running BigCo and looking for potential investments to grow a US$30 billion – US$300 billion profit pool presents a distinctly different challenge. The simple fact is the opportunity set for those relatively smaller dollar amounts is infinitely larger.
Recently, I’ve seen strong, established midsize businesses in my opportunity set make bold moves during the pandemic that can markedly move the needle. For instance, one made the largest acquisition in company history while another made a tender offer to buy a subsidiary. These actions could help drive impactful future returns for investors. In contrast, driving growth with similarly nimble, tactical moves is much more challenging for mega-cap firms.
This will be a fascinating period to reflect on
It may be difficult to imagine these impressive companies not excelling given their historic consistency and success. I liken their position to a superstar athlete like Lebron James — a phenomenal basketball player with a distinguished history of performing at the highest level. However, like all great athletes, his one undefeated opponent is age and it will inevitably win. In my view, the law of large numbers is a similarly mighty opponent for even the best businesses.
So, how much is a trillion dollars? For today’s mega-cap owners, it’s a lot, but it’s not enough.
1Sources: US News and World Report, 2018. National Center for Education Statistics, May 2020. | 2 Example company ‘BigCo’ analysis reflects a simplified mathematical example intended solely for illustrative purposes. Actual companies will have different results and forward-looking statements or assumptions should not be considered a prediction of future events. | 3Average based on combined company estimates, May 2020. | 4Figures include annual stock dilution. | 5Source: Statista, based on approximate world population of 7.5 billion with 74% of the population above the age of 15.