The trillion-dollar giants that set alarm bells ringing

Amazon and Apple shares have tumbled 25% from their peak, and here's why similar lofty valuations should be a sell signal

Customers look at iPhones on display at an Apple Store this week in Beijing, China.Kevin Grayer / Getty

Rewind six months, and it all looked very different. Apple was celebrating becoming the first company in history to break the US$1 trillion market value barrier. Amazon was not far behind, crashing through 13 digits and confirming Jeff Bezos’s position as the richest man in the world. Google’s parent, Alphabet, didn’t look to be far off, and even Microsoft was getting very close to that magic number. Amid the euphoria over the rise of tech giants, a trillion was starting to become the new normal.

And now? Apple has crashed in value, and so has Amazon. It looks like it will be a while before any company gets to those kinds of lofty valuations again. Why? When a stock is worth that much, it is time for investors to get out.

The race to become the first company worth a trillion dollars was an engaging sub-plot to the tech bull market that evaporated in a wave of selling at the close of last year. In the end, the contest was won by Apple when, on Aug. 2, its shares punched up to US$207.05. It was followed by Amazon, which broke through on Sept. 4, and for a while it looked as if a whole group of trillion-dollar companies would follow.

The trouble is, it was always a huge valuation to put on one business that sells phones, and another that sells books and a bit of other stuff online. It is more than the GDP of 183 of the 199 countries for which the World Bank collects data, including biggish ones such as Turkey and Holland. It is more than the entire value of the Spanish stock exchange, and it is equivalent to five per cent of America’s GDP, or one per cent of the entire world’s. You had to have absolute faith in both companies to believe they were worth that much.

As it turned out, they weren’t. The crash since then has been a steep one. Apple’s share price has fallen from a peak of US$230 in October to just US$147 now, hit particularly hard by stalled iPhone sales, especially in the Chinese market. It is now worth just over US$700 billion. In total, US$300 billion of that market value has gone up in smoke. Amazon has fallen from US$2,000 a share in September last year to US$1,350 just before Christmas, and its value is down to US$770 billion, a long way short of the magic trillion mark.

Of course, there were specific factors behind those falls. As well as slowing sales in China, both Amazon and Apple have been hit by the wider selloff in tech shares; as well as the downgrading of the entire equity market as global growth starts to cool; and the Federal Reserve, at least until last week, seemed intent on pushing up interest rates. But the important point is this. It is starting to look like a trillion is the new sell signal — a sign that it is time for investors to get out of a company.

Here’s why: First, it almost inevitably means there is a bubble. In reality, no company can yet hit that kind of valuation without some degree of unjustified hype. At Apple, investors were assuming that it could carry on pushing up the prices of its models, and persuading its customers to keep on upgrading every couple of years, while also expanding into services such as music and film streaming. At Amazon, they were buying into Jeff Bezos’s vision of the “everything store” that could supply you with just about all you needed with a simple nod toward that Alexa device in the corner. Both were starting to trade at extraordinary ratios. A barely profitable Amazon was priced at more than 250 times its actual earnings, while Apple went as high as 40 at its peak. Sure, both of them are great companies in their own way. But they aren’t necessarily quite that great.

In a free market, outsized profits get competed away very quickly

Next, it inevitably attracts competition. When a company is so fabulously successful that its value breaks through US$1 trillion, then plenty of other people start to notice, and decide they would like a slice of that as well. In a free market — and the internet remains a ferociously competitive arena — outsized profits get competed away very quickly. You can see that most clearly at Apple, where rival phone manufacturers (most notably China’s fast-rising Huawei) have started making brilliant devices that sell for a lot less. Amazon has so many different strands to its empire it doesn’t have a single competitor, apart arguably from China’s Alibaba. But it does have lots and lots of smaller rivals chipping away at it. When you are that big, everyone will try to knock you off your pedestal.

Finally, as it becomes more and more dominant, a business faces an inevitable backlash. Politicians are going to start complaining that it is abusing its market power, that it doesn’t pay enough tax, its workers are not being treated fairly, and competitors are getting squeezed. Both Apple and Amazon have seen a wave of complaints against them, from massive fines and tax demands from the EU to potential anti-trust regulation in the U.S. The Democratic senator Bernie Sanders even introduced a “stop Bezos” law (it stands for “stop bad employers by zeroing out subsidies”) just so there was no doubt who was being targeted. On top of that, Wall Street analysts and the hedge funds start scrutinizing business models for any flaws. There is some serious money to be made from shorting a one-trillion-dollar company if you can identify what might go wrong. That inevitably makes life far harder.

A free market is very good at cutting oversized companies down to size. One day a market value of more than a trillion might well be commonplace. For the moment, however, it is a signal that a company has become over-valued, grown too big, and is about to face more regulation and more competition — and that means it is time for investors to get out.

