by Adam Sharp
I have a running debate with an old friend.
The topic: Which stock will reach a $1 trillion market capitalization first?
Market cap is (arguably) the best way to size up a company's worth, as it takes everything into account: assets, liabilities, growth, and more. Market cap is calculated by multiplying a stock's price by the total number of shares outstanding.
Example: Microsoft's current market cap is $218 billion. Microsoft has issued 8.65 billion shares over the years, so with the stock trading around $25, the market cap is ~$218b.
Today, not one company in the world is worth more than $500 billion — let alone $1 trillion (that's a 1 with 12 zeros).
And while we may not see a trillion dollar company for 10 years or more, trying to guess who will get there first is absolutely a worthwhile exercise. I like the fact that it forces long-term thinking.
Which companies do you want to own for the long run, and why?
But before we look at top trillion-dollar contenders, let's take a minute to contemplate just how much money we're talking about here.
Remember, one billion = one thousand million. It's pretty shocking when stated that way: a thousand million dollars.
And a trillion is one thousand billion.
The graphic below shows what $1b would look like next to an average-sized man. It uses stacks of 1,000 $100 bills, or $10,000 as the base (each $10k stack is only 1/2" thick).
And now $1 trillion (note that this one is double-stacked):
Click to enlargeimage source
These images should bring into focus how much money we're talking about.
The first company to reach this lofty peak will need to do something pretty impressive to get there (unless inflation gets out of control sooner than expected).
Personally, I'm betting Google (NASDAQ: GOOG) will get there first — and I'll explain why below.
Here are five contenders.
1) Apple (NASDAQ:AAPL)
- Market cap: $251b
- Annual revenue: $57b ttm (trailing twelve months)
- Rev growth: 61% YoY (year over year)
Apple — which recently passed Microsoft in market cap — certainly has a chance. Revenue growth is nothing short of astounding. The iPhone is (was?) a dominant product, and that shows on their income statement.
However, I believe Apple's need to control every aspect of their products will eventually catch up to them, like it did with the 1980's PC market. Input costs will also continue to rise as living standards in Asia increase and the dollar falls.
Unfortunately, CEO Steve Jobs' health is also a concern. If Mr. Jobs is ever forced to step down, product development will suffer.
So while Apple is a great company, I don't think they'll be the first to reach $1t.
2) Google (GOOG)
- Market cap: $161b
- Revenue growth: 23% YoY
- Profit margin: 28%
GOOG is an underdog in this race, but they're my favorite to win — and that's despite the fact that they have half the market cap of Exxon, and trail Apple by $100b today.
My advice: Don't sleep on this company. Their future is bright.
Google has unparalleled talent, software, and hardware. In 10 years, I will be shocked if they aren't the number one provider of not only search; but e-mail, analytics, payment processing, business solutions, and more.
They have the opportunity to expand into countless businesses — and they have the talent to do it.
So far, they've only seriously capitalized on search. Watch for YouTube, Docs, Android, Doubleclick, and other services to make increasingly large contributions to the bottom line going forward.
3) Microsoft (NASDAQ:MSFT)
- Market cap: $218b
- Annual revenue: $62b (ttm)
- Revenue growth: 22% (YoY)
Not a chance in hell will Microsoft win, but they make the list due to sheer size.
It may take 15 years to play out, but MSFT is dying. Open source software is the future, and it will crush Microsoft's business model in the long term.
Today, Microsoft is forced to recruit whatever talent Google rejects. They've failed in every major venture outside their core business.
Microsoft's web division is its main weakness. Even with msn.com — which roughly a billion people are forced to use by default — they can't make money. They had the chance to buy Google in 1999 for $3 million, but refused.
Don't get me wrong; Microsoft had a good run. And they'll continue to pay shareholders a big dividend...
I wouldn't short the stock, but I don't want to own it.
They will continually lose market share to competitors including Google, Salesforce.com, Apple, Oracle, IBM, and Amazon. I would rather own any of those names for the long run.
4) Exxon Mobil (NYSE:XOM)
- Market cap: $309b
- Revenue: $317b (ttm)
- Revenue growth: 25% (YoY)
This is my friend's top pick. He thinks spiking demand from developing nations will continue to drive energy prices higher, and that Exxon is best positioned to take advantage of the situation.
He may be right. Exxon is best of breed — and biggest.
5) BHP Billiton (NYSE:BHP)
- Market cap: $204b
- Annual revenue: $53b (ttm)
- Revenue growth: 36% (YoY)
BHP is the natural resource giant from Down Under.
Australia is perfectly positioned to profit from China's emergence as a major power, and BHP has a lot of what China wants — iron ore, gas, coal, minerals, and aluminum, to name just a few.
The five companies above are just a few of the contenders for first $1 trillion firm.
Did I leave any out?
In 2007, there was some fuss over PetroChina (NYSE: PTR) supposedly becoming the first $1t company. But the valuation was based on a 2.2% stake the Chinese gov't had sold to domestic investors, who drove the price up 300% on the first trading day. It wasn't representative of the company's true value, and the stock has since corrected. Today the stock is valued at around $200b. Read more on this here.