E-commerce is transforming the consumer landscape by toppling department stores; transforming the distribution of media from linear TV to on-demand digital delivery; and the auto industry is transitioning to electric and autonomous vehicles.
The transformation toward a knowledge-based economy hasn’t gone unnoticed by investors. Today’s five most valuable companies in the U.S., as measured by market capitalization, are in order, Apple Inc., Alphabet/Google, Microsoft, Facebook, and Amazon.com. Common to all of them is a high degree of personalization based on consumer use. They get smarter the more digital data they collect from the consumer. Consumers in turn are more productive, and benefit from more convenience.
Ten years ago, the top five were Exxon Mobile, General Electric, Microsoft, AT&T, and Procter & Gamble. Interestingly Microsoft is the only one of the five most highly valued companies ten years ago that has a higher market capitalization today. The shared trait of the old top five are scale benefits from offering one solution for many. The winners now have figured out how to benefit from scale, but offer more customized products or services. Today’s top five are more profitable and productive as measured by Return on Assets of 12% compared to just 5% for the heroes of the last decade. The net cash alone of the current top five exceeds the market capitalization of GE, AT&T or P&G.
Investors who sought refuge in the conventional safety of Exxon Mobile, GE, AT&T and P&G ten years ago, own companies today that are worth less with the exception of P&G which is relatively flat. An important goal of long-term investing is to increase the real purchasing power of investments above the hurdle of inflation. These companies have delivered dividends but investors have lost overall purchasing power. This is an example how conventional investing is not conservative.
The question now is which companies have the staying power, or sustainable competitive advantage, to be winners in the next decade. As companies become dominant, they naturally attract competition and more regulatory scrutiny. All of the current top five are subject to more antitrust enforcement to limit their dominance just as AT&T was years ago. Innovation and competitive advantage are the lifeblood of wealth creation and we will be vigilant to monitor these developments to position your portfolio for the ideal mix of investments.