At one time, the idea of a trillion-dollar company was almost unfathomable. As of last week, there are now four, if we do a little bit of rounding.
At the market close on Tuesday, Feb. 4, smartphone giant Apple (NASDAQ:AAPL), software behemoth Microsoft (NASDAQ:MSFT), e-commerce Goliath Amazon.com (NASDAQ:AMZN), and search engine kingpin Alphabet (NASDAQ:GOOG)(NASDAQ:GOOGL) (the parent of YouTube and Google) were all sporting trillion-dollar valuations. Technically, Alphabet went out at $997 billion and some change after "disappointing" quarterly operating results, but it had ended the previous day handily over the $1 trillion mark.
The question is: Which company among these top stocks will be the first to hit a $2 trillion market cap? While Apple and Microsoft already have a bit of a head start with valuations of $1.4 trillion and $1.33 trillion, respectively, the current rankings could easily be shuffled in the years to come.
Below, I've ranked these four giants in terms of confidence (from lowest to highest) in their ability to beat their peers to a $2 trillion valuation.
No. 4: Alphabet
Among these four trillion-dollar companies, I view Alphabet as the least likely to reach the $2 trillion plateau first (and I promise it has nothing to do with being the furthest away at this point in market cap).
The biggest issue I have with Alphabet surpassing Apple, Amazon, and Microsoft is that, while dominant among online and mobile search, its business remains highly dependent on advertising. Though we are in our longest economic expansion in U.S. history, there's little doubt that we're in the latter innings of this cycle. As the U.S. and global economies ebb and flow, so can Alphabet's ad revenue growth. This makes it, in my view, the most susceptible to an eventual slowdown in U.S. economic growth.
Then again, I wouldn't dare shy investors away from Alphabet over the long run. Having recently broken out its YouTube and cloud revenue for the first time, we can see that YouTube and cloud sales have risen by 86% and 120%, respectively, between 2017 and 2019. The thing is, these faster-growing aspects of Alphabet's business only accounted for 15% of total sales. Thus, I view Alphabet's long-term growth prospects as positive, but modest.
No. 3: Apple
Interestingly, I view Apple, which is currently the closest to $2 trillion ($605 billion away), as only the third-likeliest to achieve that mark first. Like I said, the current market-cap rankings are liable to be shuffled over time.
The biggest beef with Apple is that it's still a products company. CEO Tim Cook has made it clear that he envisions Apple becoming a services and wearables provider and slowly moving away from potentially competitive and commoditized products. But, as we saw with Apple's fiscal first-quarter results, this is still very much a story about products, with the iPhone, Mac, and iPad accounting for sales of $56 billion, $7.2 billion, and $6 billion, respectively. Put in another context, 75% of Apple's sales are still from its flagship products. Even with a 5G-capable iPhone due out this year, Apple's reliance on products leaves it somewhat susceptible to competitive risks, commoditization, and a recession.
Then again, Apple has shown incredible growth in its high-margin services and wearables. In particular, wearables, home, and accessory sales soared 37% year over year to $10 billion. That type of growth shouldn't be overlooked, nor should Apple's incredible brand loyalty or its $207 billion in cash. It's hard to make a case against Apple given the company's success and innovation, but I see two other companies with a better opportunity to beat it to $2 trillion.
No. 2: Microsoft
One of those two is Microsoft, which I view as the second-likeliest to reach a $2 trillion market cap first.
Why Microsoft over the likes of Apple or Alphabet? The simplest reasons I can provide are that Microsoft is selling a higher-margin product (i.e., primarily software and cloud-based services) to which it boasts incredible pricing power, and its primary audience remains enterprise customers. The unsung hero of Microsoft's success, even during recessions and economic contractions, is its subscription-based model, which makes it highly unlikely that businesses, or consumers, walk away from its products. This provides a level of stability that isn't as guaranteed for Apple or Alphabet.
In particular, Microsoft has seen sales for Azure and its commercial Office software and cloud services really take off in recent years. In the fiscal second quarter, cloud-computing service Azure grew sales by 62% on a constant currency basis, with Office 365 commercial revenue up a cool 30% (also in constant currency).
Perhaps the only drawback here, and why it's not No. 1, is valuation. Microsoft's forward price-to-earnings ratio is considerably higher than it's been over the past decade, while sales growth will likely flatten out to the low double-digit to high single-digit range. This still portends that Microsoft can head higher, but being the first to reach a $2 trillion valuation may not happen.
No. 1: Amazon
The giant that's likeliest to reach the $2 trillion market cap first is Amazon.
Why? Well, as much as I appreciate the company's massive e-commerce business and the loyalty that its Prime membership generates, the margin potential on retail is peanuts compared with Amazon Web Services (AWS). Having recently reported its fourth-quarter and full-year results for 2019, we saw that Amazon's cloud-focused AWS delivered $35 billion in sales, representing 37% year-over-year growth. More important, AWS accounted for 12.5% of net sales in 2019, up from 11% in 2018.
While we have seen plenty of high-growth ancillary businesses from Alphabet (Google Cloud and YouTube), Apple (wearables and services), and Microsoft (Azure), none are individually as mature or arguably generating as much annual income as AWS. In 2019, Amazon generated $5.3 billion in operating income on $245.5 billion in mostly e-commerce net sales. But AWS was responsible for $9.2 billion in operating income on just $35 billion in net sales. AWS is Amazon's growth driver, and it's becoming a greater part of total annual sales.
What pushes Amazon over the hump, in my opinion, is Wall Street underestimating just how much added cash flow AWS and its juicier margins bring to the table. Between 2019 and 2022, Wall Street will be looking for Amazon's cash flow per share to increase from $76.42 to north of $166. This would place Amazon, a company that regularly trades at 30 times cash flow, at only 12 times its cash flow per share by 2022. As for Microsoft, its cash flow is likely to grow right around the 10% mark per year. That's the difference among these companies, and why Amazon is the choice to head to $2 trillion first.