The club of stocks with market caps above $1 trillion is highly exclusive. It can be tempting to think these enormous companies' best days are behind them. After all, they have generally been around for decades, delivering market-shattering returns. And it's much harder for a stock of this size to double or triple compared to their small-cap counterparts.
But for some of them, the future still looks exceptionally bright. That's the case for Amazon (AMZN 7.88%), Microsoft (MSFT 1.81%), and Alphabet (GOOG 3.47%) (GOOGL 3.61%). These three tech giants are already among the largest companies in the world, but here's why I expect them to rank as the three largest stocks by 2040.
Second to none in their main industries
Over the past few decades, Amazon, Microsoft, and Alphabet have produced impressive results by becoming leaders in their respective main businesses. Let's start with Amazon. From its modest inception as an online bookseller, the company became an e-commerce juggernaut, building a huge competitive edge.
Amazon's e-commerce operations benefit from the network effect -- the value of its service increases as more people use it. The more merchants it has, the bigger the draw is for customers, and vice-versa. As of October 2021, it held a 41% share of the U.S. e-commerce industry -- with Walmart coming in second place at 6.6%.
Microsoft is a top dog in the computer operating system with 76% of the market share as of June. Microsoft benefits from a strong moat bolstered by its services' high switching costs. Its productivity tool suite -- Word, Excel, Outlook, Teams, Powerpoint -- is entrenched in the day-to-day of businesses, students, families, and most people who regularly use computers.
Changing providers of these digital services is difficult. It's hard to adjust to a new operating system and transferring essential data is costly and time-consuming.
Now turning to Alphabet, the parent company of Google, the world's dominant search engine, evident by the fact that Google has become a verb. Alphabet's market share in the search engine space was 83% as of June.
Google will continue to own the industry thanks to competitive advantages including its brand and the network effect. The more people who use the search engine, the more relevant data Alphabet collects to deliver better search results, leading to an improved user experience. And better search results keep consumers coming back.
As leaders in these spaces with solid moats, Amazon, Alphabet, and Microsoft will keep capitalizing in order to generate outstanding long-term returns. All three are present in other markets as well. Alphabet owns YouTube, the top video hosting website. Microsoft has a huge footprint in gaming. And Amazon's Prime is one of the most popular streaming platforms and the company announced this week that it plans to buy healthcare company One Medical for $3.9 billion. And there's more...
Seizing another lucrative market
Amazon, Microsoft, and Alphabet boast exciting growth avenues beyond the industries they started in. They are the three most prominent players in the cloud computing industry.
Various cloud computing solutions provide juicy benefits to businesses, including cost-efficiency, data management, and improved productivity. As of the fourth quarter of 2021, Amazon Web Services, Microsoft Azure, and Google Cloud were the top three (in that order) players in this area, with 33%, 21%, and 10% share of the market, respectively.
According to projections, the cloud computing industry will expand at a compound annual growth rate of 17% through 2030. These companies generally generate plenty of cash, which will enable them to pour money back into cloud computing to benefit from this long-term tailwind.
AMZN Cash and Equivalents (Quarterly) data by YCharts
Although these tech giants are competing in cloud computing, the industry is projected to hit $1.6 trillion by 2030 -- that's more than enough space for all three players (and many others) to be highly successful.
Size matters, but it isn't everything
A handful of other companies could challenge Amazon, Alphabet, and Microsoft as the top dogs by 2040. But even if my prediction does not come to pass, it wouldn't matter all that much. The most important thing for investors to remember is that all three are solid businesses with excellent prospects and a proven ability to innovate, generate consistent profits, and beat the market.
Whether they are the largest stocks by market cap when 2040 rolls around matters less than the stock performance they will deliver in the meantime. And the evidence strongly suggests that all three will continue to excel. That's why Amazon, Microsoft, and Alphabet are worth adding to your portfolio today, especially considering they are currently feeling the effects of the broader market sell-off and are trading at historically attractive prices.
