International Financial Management: Trillion Dollar Companies Report

This report delves into the realm of trillion-dollar companies, examining their significance, valuation methodologies, and the implications of their market dominance. The analysis begins by defining 'mega-companies' and assessing the validity of the New York Times article's conclusions regarding their impact on economic inequality and stagnant wages. It then explores the significance of achieving a trillion-dollar valuation, contrasting it with previous instances like PetroChina. The report discusses the two primary methods of company valuation, intrinsic and market value, and assesses whether market valuations, particularly for companies like Apple, may be overvalued. Finally, the report identifies five companies on the US Stock Exchange—Alphabet, Microsoft, Berkshire Hathaway, Facebook, and Bank of America—that are poised to become the next trillion-dollar entities, providing rationale for their selection based on their current market capitalization, performance, and brand recognition. The report uses data as of November 1, 2018.

Running Head: Leadership and Management Development
Leadership and Management Development

Leadership and Management Development
Contents
Introduction...........................................................................................................................................2
Mega companies...................................................................................................................................2
Significance of a trillion-dollar company................................................................................................2
Company valuations..............................................................................................................................3
Achievement of trillion-dollar valuation................................................................................................4
Next 5 trillion-dollar companies............................................................................................................4
Conclusion.............................................................................................................................................6
References.............................................................................................................................................7
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Introduction
Investors are always interested to know about the market capitalisation of the companies and
prefer to invest in those which have the value of million and billions. But what happens when
an investor sees a Trillion dollar company; there are usually two things they either get happy
if they have even a single stock of that company or get burst out badly if they either sold that
stock few days or months or years back. The same happened when Apple became the first
trillion dollar company and got the tile of being a Mega company.
Mega companies
By the word Mega we mean Big and Mega Corporation means big companies but the
question is what we actually mean by the big companies. A company can be big in terms of
its revenues, size, sales, market capitalization, employee base etc. Earlier in 1955, when
Fortune magazine listed America’s 500 biggest corporations then it considered revenue as a
parameter for stating the companies as mega companies. That year General Motors got the
first position with around $10 billion annual sales and it was big not only in terms of
revenues but also in terms of market capitalisation, assets, employment etc. As per the article
issued by the New York Times, Apple with US$1 trillion market valuation has been
considered as the mega company. Here, we could see that New York Times has taken market
capitalisation figure to title the company as Mega Company (The New York Times, 2018).
So, now-a-days companies with the highest market capitalisation are considered as mega
companies.
I do agree with the conclusion of the article which states that the when a company become
mega company in terms of market capitalisation then it lead to the problems like stagnant
wages, rising income inequality, a shrinking middle class etc. Earlier where only 109
companies were enjoying half of the total profits earned by the public trading companies now
it is just 30 companies enjoying half of the corporate profits. Half of the gains of indexes
come from the top 5 tech companies which include Apple, Facebook, Google, Netflix and
Amazon. However, it is good for an index only till the above stated companies are earning
profit or else it could lead to a big problem in case they incur losses. In America,
consolidation of corporates and their profits has started posing its adverse impact beyond the
stock market. Earlier, roughly two third of the total nation’s wealth was going to the workers
but recently from 2000s we could see that this share of worker has not gone up even a single
inch above 59% (The New York Times, 2017).
Significance of a trillion-dollar company
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No doubt, being first in anything draws much attention than being second or third. The same
thing happened when Apple became first trillion dollar company. After becoming a trillion
dollar company it grabbed enough media attention. We all know that this valuation would
surely come down but marking such a huge success which never ever happened in the
history, is something unforgettable. Amazon is the second trillion dollar company but still it
would not be remembered and recognized much like the person who secured second position
in four minute mile running. However, we remember Roger Bannister, the first person who
ran four minute mile.
Earlier there might be many investors who were not confident about investing in the stocks or
were not into investing in Apple. After Apple became trillion dollar company then the person
who would have dropped the idea of investing in the Apple’s stock might be cursing them at
present or the person who invested their small sum in the Apple’s shares might have turned
into millionaire/billionaire in a single night. So now, none of the people in the whole World
can afford to lose even a single share of Apple and in the same way anyone cannot afford to
buy its single share so easily.
There were misconceptions that large companies are hard to manage. From last many years
there were many alarmists who were warning Apple that their massive size can prove to be a
reason behind their destruction. People even say such a big size of any company is equal to a
recipe of disaster. Sometimes the banks’ bigger size is held responsible for their failures
which lead to the economic downturn of 2008. In the year 2013, JP Morgan addressed that
IBM’s size could act as a problem for its own business. When Apple became trillion dollar
company then it proved that mega companies can be managed really well. It made clear that
businesses are hampered by the poor leadership style, misguided development of product and
even too much diversification could be a reason behind business failure. In any case, big size
of the business cannot be a problem (Investor Place, 2018).
Company valuations
There are usually two methods of valuing a company; one is intrinsic value and the other is
the market value. This intrinsic value is calculated with the help dividend growth model,
dividend discount model, constant growth model etc. It is purely based on the cash flows,
assets, liabilities of the company. The other way to value a firm is using market value. It
refers to calculating the current value of the company using the current price of its shares.
So, if we value Apple Inc. using the intrinsic value then we could find the true value of the
firm. The company can be valued using the future earnings of the company by applying
discounted cash flow analysis or may opt to find the pure actual liquidation value of the firms
using all types of tangible and intangible assets and liabilities, cash flows and incomes and
expenses. The value of the company can be calculated through market value which is based
on the demand and supply of the company’s stock on the exchange. Market value is the
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market capitalization of the firm which is arrived by multiplying total number of shares
outstanding with market price per share.
Many reputed analysts like Warren Buffett say that the market value of the Apple’s stock are
too expensive and has termed it as overvalued (The Motley Fool, 2019). It is always better to
buy those stocks whose intrinsic value is higher than the market value. Therefore, the stocks
of the Apple should be valued at the intrinsic value because the market values of the shares
are influenced by the public sentiments. In simple words, the market value of stocks is purely
driven by the estimates and thoughts of the investors which are influenced by news, media,
analysts’ opinion, and many other factors. Apple has built a very high level of trust and
confidence among its investors because of its continuous success of iPhone sales, iMac, iPod
and continuous launch of innovative and disruptive products. All these have largely
influenced the public sentiments as a result of which the market value of Apple’s stocks have
touched one trillion dollar making it a mega company. Since, the demand of the investment in
Apple’s stock is more the possibility of the stocks being overvalued are on a higher side.
Achievement of trillion-dollar valuation
Apple is not the first company which became a trillion dollar company. Long-time back,
there was a company named PetroChina. PetroChina was the leading Chinese oil company
which achieved the milestone of becoming a trillion dollar company in 2007. However, the
company did not perform well after that. The company debuted on Shanghai exchange on
November 5, 2007 and on the opening date the price of its shares got tripled. The price of
those PetroChina shares which were listed on Hong Kong exchange also went up as a result
of successful debut on Shanghai exchange. At the end all these led the market capitalization
of PetroChina hit 1.1 trillion dollars on both Shanghai Exchange and Hong-Kong Exchange.
No doubt the start was unbeatable and historic both but by the end of the year 2008 the
market value came down to less than $260 billion. All those investors who invested their
money in the shares of PetroChina driven by the success debut faced the biggest destruction
of their wealth. In the world history it was regarded as the biggest loss of shareholders’
wealth (Bloomberg, 2017). At the end this company actually crashed and lost around 80% of
its valuation.
There was one more company named Aramco which was being valued 2 trillion dollars by its
investors. However, this company is yet not being listed publicly on any stock exchange
(Quartz, 2018).
Next 5 trillion-dollar companies
After Apple and Amazon there are few more companies who have the potential to become
the trillion dollar companies. I have prepared a list of next five companies which have the
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potential to be the next trillion dollar companies. All these five companies are listed on US
stock exchange. These stocks are selected on the basis of its performance and brand
awareness they have created in the last few years. Attractive market capitalisations of these
five companies are also the reason why I have included them in the list (Table A).
Table A: Market Capitalisation 2018
Company Market Capitalisation (2018)
Alphabet (Google) $ 785.17 billion (Macrotrends, N.D.)
Microsoft $ 779.90 billion (CNBC, 2019)
Berkshire Hathaway $ 480.46 billion (Macrotrends, N.D.)
Facebook $ 395.78 billion (Macrotrends, N.D.)
Bank of America $ 250.36 billion (Macrotrends, N.D.)
1. Alphabet (Google) - Alphabet is the parent company of Google. There are eight
different tools of Google; Gmail, maps, Search, YouTube, Google Drive, Chrome,
Google Play Store and Android, used by more than 1 billion active users. These
services are provided to the users for free of cost but every time the users use these
tools their data are collected which are sold by the Google. Also, it is not expensive
for Google to maintain these tools once they are made ready to use. Apart from this,
Google gets a lot of money from the advertising. So the chances are really high for
Alphabet to become the next trillion dollar company and it would take only 20% more
gain to reach that level.
2. Microsoft- Microsoft which is popularly known for its Windows operating system for
the computers and the office suite applications like excel, word, PowerPoint etc. It
seems that the day is not that behind when it would fetch a value of trillion dollars.
There are many reasons which could make the company reach that level. Firstly, the
company's cash position is really strong. Secondly, the successful acquisition
LinkedIn has drawn the attention of almost everyone who are the market watchers.
Also, the company's earning have got almost double in spite of moderate sales
growth. Microsoft is also getting the benefit of both high switching costs and network
effects. Therefore, these reasons and more such reasons are enough to believe that
there are high chances for Microsoft to become the next trillion dollar company very
soon.
3. Berkshire Hathaway-Berkshire Hathaway could become a trillion dollar company
because of many reasons. First reason could be the image of Warren Buffet who is
recognised as the master of investment world. The second reason could be the strong
cash position of Berkshire Hathaway which became a lender of choice in the worst
scenario of 2008 financial crisis. Like Microsoft, Berkshire Hathaway has shown that
it can grow it earnings twice of the growth in their sales, this could be the third
reason. The fourth reason could be the competitive advantages which are being
enjoyed by Berkshire Hathaway. The fifth reason could be the 60% revenue which is
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coming from GEICO gecko, an insurance business with high switching costs and
which enjoys the advantages of strong brand awareness. The last but not least, the
largest amount of Berkshire’s income come from the massive investments made in the
stocks like Apple.
4. Facebook-For Facebook it would not be so easy to reach the level of becoming trillion
dollar company. However, if it continues to perform well and comes with new and
innovative ideas then later or sooner it can become a trillion dollar company.
Facebook earns a good amount of revenue from advertising just like Google. Almost
all people in the world know about the brand so it also enjoys a high brand awareness
and equity. So, Facebook is the company with the potential of becoming next trillion
Dollar Company.
5. Bank of America- Bank of America has shown an outstanding performance in
consumer banking business as well as lower corporate taxes. Its quarterly profit has
also got tripled which makes it a company eligible for paying a good amount of
dividend to its investors. The bank has also informed that it has brought $26 Billion in
common stock. All these depict the people’s inclining interest towards the Bank of
America’s stock. It seems if the company continues to perform in the same manner
and wins trust and confidence of investors then it could also be a trillion dollar
company soon.
Conclusion
Becoming a trillion dollar company is itself a pride and shows the investors trust and
confidence in the company. However, sometimes these public sentiments overvalue the stock
price which could be disastrous like what happened in case of PetroChina. Apart from this
there are many more companies who are in the queue of becoming the trillion dollar company
or mega companies.
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References
Bloomberg.(2017).The Biggest Stock Collapse in World History Has No End in Sight.
[Online].Available from: https://www.bloomberg.com/news/articles/2017-10-29/the-biggest-
stock-collapse-in-world-history-has-no-end-in-sight [Accessed 10 July 2019]
CNBC.(2019). Microsoft closes out 2018 as the top public company.[Online]. Available
from: https://www.cnbc.com/2018/12/31/microsoft-finishes-2018-as-the-top-public-
company.html [Accessed 10 July 2019]
Investor Place.(2018).What’s the Significance of Apple’s $1 Trillion Valuation? More Than
You Realize.[Online]. Available from: https://investorplace.com/2018/08/whats-the-
significance-of-apples-1-trillion-valuation-more-than-you-realize/ [Accessed 10 July 2019]
Macrotrends.(N.D.). Alphabet Market Cap 2006-2019 | GOOGL.[Online]. Available from:
https://www.macrotrends.net/stocks/charts/GOOGL/alphabet/market-cap [Accessed 10 July
2019]
Macrotrends.(N.D.). Berkshire Hathaway Market Cap 2006-2019 | BRK.B.[Online].
Available from: https://www.macrotrends.net/stocks/charts/BRK.B/berkshire-hathaway/market-
cap [Accessed 10 July 2019]
Macrotrends.(N.D.). Facebook Market Cap 2009-2019 | FB.[Online]. Available from:
https://www.macrotrends.net/stocks/charts/FB/facebook/market-cap [Accessed 10 July 2019]
Macrotrends.(N.D.). Bank Of America Market Cap 2006-2019 | BAC.[Online]. Available
from: https://www.macrotrends.net/stocks/charts/BAC/bank-of-america/market-cap [Accessed
10 July 2019]
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Quartz.(2018).Apple just became America’s first trillion-dollar company.[Online]. Available
from: https://qz.com/1345748/apple-just-became-americas-first-trillion-dollar-company/
[Accessed 10 July 2019]
The Motley Fool.(2019).Warren Buffett Thinks Apple Is Too Expensive.[Online]. Available
from: https://www.fool.com/investing/2019/02/25/warren-buffett-thinks-apple-is-too-
expensive.aspx [Accessed 10 July 2019]
The New York Times.(2017).‘Superstar Firms’ May Have Shrunk Workers’ Share of Income.
[Online]. Available from: https://www.nytimes.com/2017/03/08/business/economy/labor-
share-economic-output.html?module=inline [Accessed 10 July 2019]
The New York Times.(2018).Apple’s $1 Trillion Milestone Reflects Rise of Powerful
Megacompanies.[Online]. Available from:
https://www.nytimes.com/2018/08/02/business/apple-trillion.html?login=google [Accessed
10 July 2019]
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