Next Trillion Dollar Companies

Apple achieved another historic milestone by becoming the first company in the world to reach a market valuation of $3 trillion. Previously, on August 2, 2018, it became the first company to reach a market valuation of $1 trillion, and on August 19, 2020, it became the first company to reach $2 trillion. Given its unwavering brand strength and continued success, it is likely that Apple will maintain its position as a frontrunner and potentially reach the $4 trillion mark in the future.

When considering revenue, Apple holds the position of the seventh largest publicly listed company globally. It is worth noting that out of the top seven companies in terms of revenue, four are predominantly involved in the oil and gas industry. While Walmart and Amazon are consumer-facing companies, their revenue stems from their operations in the supermarket and e-commerce business, where they sell various consumer goods and consists of many brands. Both Walmart and Amazon operate on high volume sales with thin profit margins of around 1-2%.

Apple distinguishes itself as a unique entity among other companies due to its status as a prominent consumer brand. It is a remarkable feat for a single brand to secure the seventh largest revenue globally, a feat that has proven difficult for other companies to replicate. In contrast, even the next largest consumer brand in terms of market capitalization, Volkswagen, achieved its position by employing a multi-brand strategy, encompassing brands such as Audi, Bugatti, Bentley, Porsche, Ducati, Lamborghini, and others.

Apple's profitability is truly remarkable, positioning it as the second-largest company in the world in terms of net profits, trailing only behind Aramco. When it comes to brand profitability, Apple stands in a league of its own, with no other single brand able to match or even come close to its $94 billion net profit. While many investors categorize Apple as a technology company, its true value lies in the exceptional strength and recognition of its brand.

Even at its massive scale, Apple has achieved an impressive net profit margin of 29%. This signifies the premium attached to its brand, enabling Apple to charge prices that far exceed its production costs, while customers willingly pay the premium, leading to substantial profit margins. Apple can therefore be seen as a luxury brand. While a luxury brand typically sells to a smaller and exclusive consumer base, Apple has managed to sell its products to the masses at luxury price points. No brand has ever done it before in history.

Considering these factors, Apple is likely to continue its upward trajectory and potentially reach a market capitalization of $4 trillion given enough time.

Presently, there are six companies that have achieved a trillion-dollar market capitalization. There is a high possibility that Tesla and Meta (formerly known as Facebook) could regain their status and rejoin this exclusive club after losing their trillion-dollar status in the past two years. Meta's prospects are improving as Mark Zuckerberg stops talking about the metaverse, while Tesla has experienced a remarkable 83% surge in orders during the second quarter. To reach the trillion-dollar milestone again, Tesla would need to achieve an additional 20% gain, while Meta would need a 36% increase in its market value.

Berkshire Hathaway could be seen as a surprising contender to join the trillion dollar club. This conglomerate holds significant investments in the oil and gas sector, which is home to some of the largest companies globally. This exposure increases Berkshire Hathaway's chances of reaching this milestone. Furthermore, the conglomerate possesses a substantial stake in Apple, further bolstering its potential. To attain a trillion dollar market capitalization, Berkshire Hathaway would need to achieve a gain of 34% from its current level.

In my opinion, Nvidia's trillion dollar status might be at risk as its fundamentals have yet to catch up to sustain such a high valuation. Among the trillion dollar companies, Nvidia possesses the smallest revenue, with $26 billion. Comparatively, Microsoft, the next smallest company in terms of revenue, generated $208 billion, which is eight times larger than Nvidia's revenue. Even TSMC's net profit of $33 billion surpasses Nvidia's entire revenue, and both companies benefit from the growing demand for AI chips. Furthermore, Nvidia's price-to-earnings (PE) ratio of 218x is one of the highest among the top ten largest companies, indicating a notable level of overvaluation. Considering these factors, I believe that the current degree of overvaluation for Nvidia is unsustainable in the long term.

Microsoft and Aramco are the frontrunners poised to reach the $3 trillion market capitalization milestone, requiring an 18% and 44% gain from their current prices, respectively. Microsoft appears to have a higher likelihood of achieving this feat as it is relatively closer to the target. On the other hand, Aramco's potential to reach $3 trillion is subject to the volatility of oil prices, which are anticipated to decline as the economy slows down.

Alphabet (the parent company of Google) and Amazon are also making strides toward reaching the $2 trillion market capitalization mark, necessitating a 31% and 50% increase in their respective stock prices. Alphabet appears well-positioned to maintain its dominance in the search engine market, as Google Search continues to be the preferred choice over Bing, despite recent AI improvements by Microsoft.

Meanwhile, Amazon remains the leader in the cloud computing sector, with a significant advantage over Microsoft in terms of cloud revenue. This gap highlights Amazon's strong foothold in the cloud market. Moreover, Amazon's stronghold in the ecommerce industry, coupled with its robust logistics network in North America, continues to fortify its competitive advantage.

Despite the deceleration in economic growth, it continues to expand, which bodes well for trillion-dollar companies. These enterprises are likely to witness steady increases in revenue and earnings as time progresses, resulting in higher market capitalizations. However, it is important for investors to acknowledge that the journey may not be entirely smooth, and market corrections can temporarily reduce their share prices. Nevertheless, with time, we may witness the emergence of the first $4 trillion company, alongside a proliferation of $3 trillion, $2 trillion, and $1 trillion companies.