Analysis: Dominance of Apple and tech titans has huge risks

The global investment landscape has been transformed since 2009.

At the time, the world was left reeling from the impact of the US subprime crisis leading to a global recession of enormous magnitude, leading central banks to flood the world with almost unlimited liquidity and trillions of dollars of bond purchase programmes.

In the six years since the economic crash, global equity market surges have resulted in several trillion dollars of value being created and the single largest beneficiary has been the technology sector, which experienced a several fold increase in value, principally the largest companies in the sector.

The most valuable US technology companies —Apple, Amazon, Google, Microsoft, Facebook, Oracle, IBM, Intel, Cisco and Qualcomm — are worth a combined $2.9 trillion (€2.6tn) today. Those same companies were worth in the region of $1tn in 2009.

The sheer magnitude of the increase in value of the leading technology companies is of a scale that has rarely been experienced by a single sector in such a relatively short period of time, save the mania surrounding technology at the turn of the century.

In the case of Apple, now the world’s largest company, its own value has increased from $95bn in 2009 to $700bn in 2015.

There have also been success stories in China with companies such as Tencent and Alibaba floating on the US stock market.

Firms such as Hewlett Packard and Nokia, both of which featured as being in the top 10 of global technology companies in 2009, have experienced significant declines in value since and are no longer industry leaders.

The shift from hardware focused companies such as Hewlett Packard and IBM towards more software, social media and e-commerce orientated peers has caused a shift in power in the industry, rewarding Microsoft, Amazon, Google and Facebook.

These fixed asset-light companies are able to earn higher margins and generate superior returns on capital than their older, more asset heavy competitors.

Along the path to finding the next big thing, a path well-travelled by technology firms, it is often the case that companies over extend their present value on the basis of future hopes and dreams.

Take Amazon as a case in point. From its humble beginnings as an internet bookseller, Amazon has morphed in one of the largest e-commerce companies in the world.

The company effectively serves as an economic transfer mechanism distributing items that were previously bought in physical stores and instead delivers them directly to consumers.

Amazon has a market value of $300bn, but reported a GAAP net loss of $241m in 2014.

The expectation is that the company will earn $866m in 2015, before increasing to $2.5bn in 2016 and $4.9bn in 2017.

Future forecasts need to be high to try and in some way justify the current price of the shares, even if the estimates are highly ambitious.

A key question is whether Amazon, with revenue of $100bn and earnings of under $1bn, should be worth $110bn more than Wal-Mart given the latter company’s $500bn of revenue and $14bn of earnings.

The scale of the importance placed on the tech titans by the market may not be highly visible to investors but it is very real and very large.

The S&P 500 has a market value of $19tn and the leading technology companies mentioned above are worth $2.9tn which equates to 15% of the index’s value being confined to a small list of companies in a single sector.

The Nasdaq-100 index has 109 companies but of those companies, nearly 50% of the index comprises the tech titans listed. That brings enormous concentration of risk.

The past six years have been great for global equity markets.

But the exposure of investors to such a small number of companies in what is a fast changing sector raises similarities to previous periods of excess. We have seen time and again that current technology leaders are rarely the future’s growth drivers.

David Holohan is head of research at Merrion Capital