1 trillion – that’s really a large number. This number is even mindboggling when a single company or entity commands a 13 digit market capitalisation. The closest to hit USD1 trillion market cap as a publicly traded company was Microsoft at USD 619 billion. To put this number into perspective, a trillion dollar market cap will make this company the 16th largest economy in the world in terms of Gross Domestic Product (GDP) measured in 2012, after South Korea (USD 1.12 trillion), a rank above Indonesia (USD 846.83 billion) and bigger than the GDP of other 179 countries.
So which company is in the run to be worth this cool USD1 trillion?
(You know what’s cool now Sean Parker? A trillion dollars)
Google stands the likeliest chance to be the first to hit this trillion dollar benchmark. Previously, many thought Apple would be the first. But looking at how both companies are playing their game, more likely Google it will be. Apple is hoarding onto their $145 billion cash with little innovation whilst Google, with only close to 1/3 of Apple’s war chest of $50 billion is carrying out many experiments, innovations and investments. Although much of Google’s revenue is derived from their ads business, they are diversifying their business model and applying their expertise in other large industries (ie. energy, communications, transportation) and also experimenting with moonshots innovation which could someday turn into significant businesses.
Many will argue that Google is taking big risks, and potentially wasting their resources innovating in industries non-related to their core business, entering into industries that they have little experience and going up against incumbents. In fact, even more the reason for a company to invest more in innovation and R&D when their balance sheet is flooded with cash. The consequences of failure is not significant. It won’t take the company down. Another company akin to Google’s diversification strategy and innovative drive is Amazon (as much as Amazon is an innovative giant itself, for various reasons they won’t be a trillion-dollar company any time soon). Here’s what Jeff Bezos, the visionary founder and CEO of Amazon has to say about innovation and taking bets:
Better to place bets early when the company is doing fine than when it’s too late. Shareholders will make less noise with Google, for example, spending $5 billion or even $10 billion on innovation when they have $50 billion in the bank and having good times with their core business rather than when the cash hoard is depleting and the ship is sinking. Remember Kodak or Blockbuster? They failed to innovate with changing times, became irrelevant and they had to file for bankruptcy.
Snapshot of Google’s financials
Google is worth $290.31 billion today and it’s share price has to grow 3.44x before hitting the trillion dollar value. Currently, Google is trading at multiples of 5.79x and 27.03x their FY2012 revenue and profit respectively. Assuming these multiples hold, Google has to achieve a revenue of $172.65 billion and profit of $37 billion to get to the trillion dollar point.
Since 2008, for the past 5 years, Google has been growing their revenue and profit on average at 18.86% and 20.48% per year respectively. Assuming this growth rates hold as well, it will take 7.12 years to hit the expected revenue and 6.64 years to hit the expected profit for Google to be worth a trillion dollars. This means Google has between 6.64 to 7.12 years to grow their topline and bottomline to become the first trillion dollar company by 2019 or 2020.
In arriving to this estimation, an assumption is made that these multiples and growth rates remain constant throughout the next 6 to 7 years. Of course, there are many variables that affect the market. No one can predict the market. An economy downturn will slow the growth of Google’s valuation, or a bull market will boost their market cap even faster and higher. But for the sake of this article, we assume for the multiples and growth rates to be constant for easier estimation. Alternatively, if you do have the time, feel free to carry out your own sensitivity analysis with different growth rates and multiples to get more results and please do share it with us.
Is it even reasonable for the assumptions above to remain constant? Google is already such a giant and to grow at these rates, its absolute growth has to be massive and highly unlikely to maintain it. Partly, this is correct. However, I believe Google’s strategy and rate of innovation will give them the chance to be a player in other big industries and become a dominant player in new huge, emerging markets (the bottom billion). With these opportunities combined with Google’s core businesses that are still in growth mode, it doesn’t seem too impossible for Google to be the first ever $1 trillion dollar company. In the words of Bill Gates, ‘we always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten.’[Part 1 is a quantitative analysis of Google’s trillion dollar journey. In the next part that will be more qualitative, I will share my thoughts on the opportunities present and the effort Google is putting in that will take them to the next frontier of market capitalisation and human civilization.] For more info on Google’s financials, visit here
This article was originally posted at Rowing This BoatContinue reading This company might be the first ever $1 TRILLION dollar company [Part 1 of 2]