As Thursday’s market closed, Apple reached a milestone $1 trillion valuation, untouched by any other company globally. This achievement was plastered across news headlines everywhere, heralded as a momentous feat of corporate success but it raises questions about what this valuation means in terms of future growth, innovation and rising inequality.
Apple and the rise of mega-companies
From humble beginnings starting off in the garage of co-founder Steve Jobs’ parents’ house, Apple has gone from a bold business idea to the most valuable publicly traded company in a space of 42 years. Forcing the tech industry away from bulky machinery and producing some of the most popular consumer goods including the iPhone, Mac and iPod, Apple has reshaped how we use tech in our everyday lives.
Along with Apple lies a list of noteworthy names including Alphabet, the parent company of Google, Microsoft and Amazon which make up the top of any list of so-called ‘mega-companies.’ Each with a market value of over half a billion dollars these companies have incredible power on the stock market as well as society as a whole.
With their high ranking on indexes like the S&P 500, these mega-companies’ stocks have a significant impact on the value of the index compared to other companies. In effect, when they move up (or down), the overall market tends to follow. Given that the S&P 500 index characterizes financial markets this tandem movement indicates the influence these companies have on society’s confidence, trading habits and ultimately the economy.
Chart 1. AAPL Market Capitalization ($bns)
Economic implications of mega-companies
Together, the top six global businesses, all of which are tech companies, are worth over $5 trillion. The consolidation of corporate profits has seen what used to be a well-diversified market with 50% of profits dispersed across 109 publicly traded companies in 1975 now become a tech-heavy landscape with those winnings captured by just 30 companies.
These corporate giants’ ability to command such high profits not only has a large impact on financial markets, through boosting confidence and encouraging speculative investment behaviour but also has broader economic implications.
The concentration of corporate profit shares has both direct and indirect implications for consumer welfare, economic growth and inequality. What we have observed over the past several decades is significant corporate consolidation within industries alongside soaring corporate profit margins. The labour share of the economy has been steadily declining in developed countries since the 1990s, coinciding with this movement towards corporate concentration. This shift has been most profound in the industries where the most profit consolidation has been observed. One argument for this, presented by economists, is that with fewer companies in a particular industry, there is less competition for workers and as a result companies are not under any pressure to raise wages. This mechanism behind waning wage growth is especially true for the tech industry, in which skills are highly specialised and non-transferable.
David Autor, an economist at M.I.T, echoes this, arguing that in the current market structure ‘since these superstar firms have higher profit levels, they also tend to have a lower share of labour in sales and value-added. As these firms gain market share across a wide range of sectors, the aggregate share of labour continues to fall.’ Overall, this trend largely explains the increase in wage inequality observed over the past few decades, the highest it has been in over a hundred years. Labour productivity is increasing disproportionally to worker’s share in wages, as their slice in the economic pie continues to shrink. A 2017 report from the US Council of Economic Advisers states “only the highest earners have seen steady wage gains” while wage growth for “most workers is sluggish and has failed to keep pace with gains in productivity.” Thus shining a light on the influence of the rise of company giants with relatively smaller yet extremely efficient labour forces, and their contributions to rising income disparity.
Sustainability of Apple’s Valuation
Historically, Apple’s business model has been centred around innovation and creating products to fill holes in the market. In the past, they have derived their value from their ability to innovate. Tim Cook, Apple’s Inc Chief Executive credits their success as “simply the result of Apple’s innovation’ and focus on products, customers and values. Apple understands this and as their iPhone sales begin to stall this has resulted in the company spending 5% of their revenue on research and development. Whilst this may be a lower figure than other major tech companies, considering their revenue, it is still a particularly large amount and one that has been rising in recent years. US investor Carl Icahn wrote that Apple’s increased expenditure on R&D “should signal to investors that Apple plans to aggressively pursue” potential opportunities.
Chart 2
The problem is, as an uninformed individual outside of Apple’s HQ it is hard to know whether or not this increased spending is actually resulting in new innovations and growth opportunities. Apple is notorious for being secretive about their product development, even to the point of not fully informing their product teams about what they are building. So this leads to the question if those in the company don’t know if they have found ‘the next big thing’ how is it possible for investors to measure the company’s value? Is this historical market capitalisation from past performance a reliable measure of Apple’s long-term prospects and ability to maintain its position at the forefront of the smartphone market?
A trillion dollars is an incredibly large number. It is the kind of number, that when talking in dollar terms, may be more likely compared to national economic accounts rather than the financial market. The question remains, where does Apple go from here? Is this monumental valuation a true reflection of future opportunities or is it based upon an inflated confidence from successes of the past?
The CAINZ Digest is published by CAINZ, a student society affiliated with the Faculty of Business at the University of Melbourne. Opinions published are not necessarily those of the publishers, printers or editors. CAINZ and the University of Melbourne do not accept any responsibility for the accuracy of information contained in the publication.
