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Why Tech Firms Dominate the Top Ten List of the World’s Largest Companies by Market Cap

Oct 30, 2019 | 4 months ago | Read Time: 3 minutes | By iKnowledge Team
Why Tech Firms Dominate the Top Ten List of the World's Largest Companies by Market Cap

The top ten companies in the world ranked by market cap in 2019

COMPANY MARKET CAP ($ BILLION)
Microsoft 904.8
Apple Inc. 895.6
Amazon.com 874.7
Alphabet Inc. 818.1
Berkshire Hathaway 493.7
Facebook 475.7
Alibaba 472.9
Tencent 440.9
Johnson & Johnson 372.2
Exxon Mobil 342.1                  

Market capitalisation is a function of the total number of shares in the market multiplied by its market price. The fact that these companies have these huge market capitalisations is a testimony to the demand for their shares. Every investor, whether individual or institutional, wants to own shares in these companies. They are among the best investments in the market.

The reason why anyone would want to buy and hold shares of a company would be due to the value it is creating and the returns it is giving. This is a simple premise. These technology companies have been fulfilling the expectations of investors, whether as a short-term investment or long-term investment. It is no wonder despite everything, even amidst negative news, they still attract investors in droves. Every asset management firm, including exchange traded funds, pension funds, retirement funds, insurance funds etc., own shares in these companies.

Here are some two major reasons why technology companies continue to hold sway in the market.

1. Performance: In April 2018, when the quarterly results of many NASDAQ listed companies were announced, five of the tech giants – Microsoft, Amazon, Alphabet (Google’s parent) and Facebook – reported profits that were beyond expectations. Profits of Amazon more than doubled, Apple’s earnings rose 30%, and Facebook reported record revenues, even though it is battling privacy related issues. Consistency in performance is a big reason that the companies are still at the top of the heap. Numbers – revenue growth and profit growth – obsesses the market and so long as the companies can deliver on that, the market treats everything else as ‘noise’. While there are short-term blips in the form of tougher regulations in anti-trust laws and privacy issues, the fundamentals of the companies are seen as strong by Wall Street analysts. [1]

2. Returns to shareholders: Shareholders love dividends and the cash-rich technology companies have not disappointed their investors. If you track Apple’s record since 2012, its dividend pay-out rate has risen by 10% every year and in 2018, the company increased its dividend by 16%, an unexpected occurrence that boosted its investors. Microsoft first started paying its dividends in 2004 and since then it hasn’t stopped. It raises its dividend rate every year. In fact, its pay-out has risen 425% in all these years. Who wouldn’t want to own a stock like that?

3Network Effects: These companies have benefited from the phenomena of ‘network effects’ by which the quality of their services increases as they grow in size. The Android Mobile Operating System for instance, becomes more valuable as more apps are developed for its app store. As more apps are developed, more users come on board the platform, which gives more app developers a large incentive to continue developing apps. Similarly, as more of our friends come on platforms such as WhatsApp, Instagram and Facebook, these services become more valuable to us, enabling the parent company – Facebook – to monetize more effectively. Amazon gets these benefits as well. Its investments in physical infrastructure such as warehouses allows it to deliver goods to a larger geography faster than just about anyone else in the market. As more users use the Amazon platform, it can invest in warehouses ever closer to its users, enabling it to deliver faster while saving money. Thus, as technology proliferates, and more and more users come on board tech platforms, the companies running these platforms can gain in efficiency. Companies as Airbnb, Uber and Netflix are also benefiting from this phenomenon.

ExxonMobil one of the giants in the oil industry and a consistent top ten lister in the Forbes list of most valuable companies, reported profits of $54 million in 2017 – Apple incidentally makes three times as much.

Even with all the competition in the software operating space, Microsoft’s operating system runs on 88% of all desktops and laptops in the world. This is despite many of its OS versions being outright disasters. The reality is that no other company has been able to produce a viable alternative that could dethrone it.

Equity markets can provide healthy returns over a long period of time. However, not everyone may have the required time bandwidth to conduct the detailed research and analysis that is needed to truly get long term returns. Experts analyse the market and invest in the right kind of investment tools that provide a balanced mix of risk and return. To know about Aegon Life’s life insurance products like term insurance and other products, visit our home page.

Citations:

[1] https://www.wsj.com/articles/why-wall-streets-love-affair-with-tech-hasnt-cooled-1522411200

[2] Associated Press, April 27, 2018 http://www.chicagotribune.com/bluesky/technology/ct-biz-tech-companies-earnings-20180427-story.html#


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