Tech’s New High-Water Mark: $1 Trillion Valuation

This is the latest in Localogy’s Skate To Where the Puck is Going series. Running semi-weekly, it examines the moves and motivations of tech giants as leading indicators for where markets are moving. Check out the entire series here, and its origin here


Russ Hanneman, the obnoxious angel investor in HBO’s Silicon Valley, spends most of the show in a quest to join and stay within the “Three-Comma Club.” Denoting net value in excess of $1 billion, it was once rarefied air but is now commonplace — for tech companies anyway — in the runaway valuations of the unicorn era.

Moreover, a new milestone has been reached by tech’s largest giants: $1 Trillion valuation. Call it the four-comma club. Of tech’s big 5 — Apple, Google, Amazon, Microsoft and Facebook — all but Facebook have crossed this mark. Market fluctuations have caused them to straddle it, but the gates have been breached.

Apple was first to do it, followed by Microsoft and Amazon (which has since dipped below the $1T mark). The latest is Alphabet (Google) which was initiated into the four comma club for the first time last week. Altogether the big five now account for more than 17 percent of the S&P 500, up from 11 percent in 2015.

Headwinds

Though a lot of this is due to a bull market — especially in tech — it also signals the gravity of these platforms. Consider that this is happening at the unlikeliest time: when regulatory pressure is heightened, privacy and data collection is at peak scrutiny, and election-cycle rhetoric projects the world’s problems on big tech.

Among these headwinds, privacy and data collection scrutiny is particularly noteworthy, as we’ve examined in light of CCPA and private-sector measures. Among the big-five, Facebook, Google and Amazon (in that order) are most subject to risk. This is probably why they’re the least valued of this high net-worth club.

But the macro takeaway is similar to the ongoing argument that today’s big five are too big to fail. This has been said in past tech cycles which all ended the same way: incumbents get old, slow and succumb to a classic innovator’s dilemma. Upstarts rose (including the now-giants) to dethrone them.

But the question is if it will be the same this time, or if they’re indeed too big to fail. It depends on their business models, with companies like Apple faced with the inherent challenge of hardware. It has to hit several home runs aligned with hardware replacement cycles. Cash position and supply chain leverage help.

Software meanwhile has easier capital requirements and unit economics. But that lowers barriers to entry for hungry upstarts. Meanwhile, Facebook benefits from a network effect (harder to start, but then it grows exponentially) but it’s also subject to the herd mentality that killed MySpace. Ask any teen about Facebook.

Platform Play

In all cases, the big five are platforms with tentacles anchored in massive ecosystems. That wasn’t the case in past tech-cycle regime changes. Though we just compared Facebook to MySpace, its positioning as the identity layer to the web was intelligently built as a way to avoid the fate of a social network “destination.”

Why is all this important to Localogy’s local commerce and SMB SaaS focus? True to the theme of the “Skate to where the puck is going,” series, the fate of tech giants largely impacts all things local. Nearly everything they do will have downmarket ripple effects on players in local media, advertising and commerce.

That’s especially true for giants with local ad plays. Incidentally, those are the same high-risk companies mentioned above, as their ad businesses are based in data collection. This is all to say watch closely for cracks in their foundations (or the opposite) for strategic implications in local commerce. We’ll do the same.

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