This guest commentary was written by Mike O'Rourke of JonesTrading. Click here to get Hedgeye's Market Brief, a free weekly newsletter featuring the top 5 trending insights on Hedgeye.com.
The past 8 years have undeniably been one of the most remarkable bull markets in history. One critical component driving the equity market performance has been the ability of 21st century disruptive companies to go from microcap to mega cap in the span of a few short years. In the bull market of the nineties, General Electric grew from a $50 Billion market capitalization company in 1990 to a $500 Billion market capitalization company at the end of 1999.
Approximately a century after its founding, GE became the largest company in the S&P 500 in 1993 and held that status until Microsoft overtook it in 1998. IBM was the undisputed bellwether technology company of the twentieth century, yet to this day, despite its Trillions of revenues and hundreds of Billions of net income throughout its history, IBM has never had a market capitalization exceeding $250 Billion.
Today, Facebook with its $500 Billion market capitalization is the fourth largest company in the S&P 500 despite only coming public 5 years ago and having only been founded in 2004. Obviously, its cumulative revenues and net income are in the low tens of Billions. Although Google is two decades old, it came public in 2004 with a market capitalization of approximately $50 Billion, and its valuation appeared capped at around $200 Billion until 5 years ago. Since then, it has exploded to $665 Billion today.
Despite being public for two decades, Amazon’s valuation was always capped at $35 Billion through 2008. In the post crisis environment, it jumped to $80 Billion and since 2012, it has run to $465 Billion. Netflix has been public since 2002 and during the pre-crisis period, it was never valued at more than $3 Billion, but since 2012, it has gone from $5 Billion to $80 Billion. These are simply the most high profile names, there are many more examples of companies going from microcap to mega cap. The marquee example in the private market is Uber’s $68 Billion valuation despite endless rounds of negative headlines.
Companies like Microsoft and Cisco Systems saw their market capitalizations grow like this from 1995 to 2000, but that certainly is not an episode that investors want to repeat. Those gains were quickly erased and it has been nearly two decades since those companies have seen those valuations.
The benefit of being a new company in a nascent industry is there are not many rules, norms or standards. They often receive benefits to see the business industry grow. It is remarkable to think about all of those years when Amazon was exempt from collecting sales tax. Today, not only is it the most dominant force in the retail industry, it is dominant in other businesses such as web hosting and video streaming to name a few. The various credits available for purchasing Tesla’s electric vehicles are another example. As these businesses become ubiquitous, norms and standards become necessary. Essentially, social media is an unregulated medium. Unregulated industries often have large profits and fast growth. At some point, industries grow up.
The recent revelations surrounding the Russian election meddling represent new, emerging challenges for this country. Senator Mark Warner has likened digital political advertising to the “Wild, Wild West.” The most alarming revelation is that American personal information was used for targeting by a foreign government. We often see privacy uproars in this country when our government targets personal information.
It is arguably worse when American companies profit by enabling foreign nations to use it to target American citizens and the American landscape. Senator Warner plans to introduce legislation which regulates political advertisements on social media with the “lightest touch possible.” That being said, most people realize the power of these businesses is the use of technology and their massive scalability that leads to hefty profit margins. Admittedly, we have no idea what the lightest touch possible means, but when connecting Billions of people, the need for human oversight is likely sizable. Anyone in the financial industry is well aware that the one area of constant growth is compliance.
Americans have generally accepted the tradeoff of exchanging our personal data for the benefits of simplicity and convenience these technology companies have offered us, we definitely did not believe that foreign governments would be able to target American citizens. Clearly, this a national security issue for not only the US, but the entire world. Social media often gets the credit for facilitating the Arab spring. That very well could have been the seed for the current propaganda wars being waged on the internet. The Federal Communications Commission regulates television and radio.
The traditional media is expected to maintain certain standards, and the public generally knows the level of trust it can place in certain organizations based on their long track records. Social Media has neither a formal regulator nor the track record. Maybe social media firms should form their own self-regulatory organizations as we in the financial industry have FINRA (although we also have the SEC, CFTC, OCC and Federal Reserve as government regulators).
Like banking or in the credit card industry, trust in the system is important. Weaning out manipulation, bots and fake accounts while creating standards will be better in the long run for the global community, but it won’t be cheap nor easy in such large networked platforms.
EDITOR'S NOTE
This is a Hedgeye Guest Contributor research note written by Mike O'Rourke, Chief Market Strategist of JonesTrading, where he advises institutional investors on market developments. He publishes "The Closing Print" on a daily basis in which his primary focus is identifying short term catalysts that drive daily trading activity while addressing how they fit into the “big picture.” This piece does not necessarily reflect the opinion of Hedgeye.
