|The ascendance of technology in the investment world. |
A common metric used to assess the success of a business venture is capitalization. That may sound like one of those enigmatic terms understood only by Wall Street regulars. In fact, it is quite simple to understand.
Capitalization measures the true worth of a company. It is calculated by multiplying the number of shares of a company’s common stock issued and outstanding times the current stock market price. In simple terms, what it measures is the amount of money that would be required to buy all the company’s common stock – and thereby own the entire company – at the current stock market price. Of course, if anyone attempted to buy all the company’s common stock in one instance, the forces of supply and demand would undoubtedly increase the current market value – or capitalization – of the stock.
The concept of capitalization will help us appreciate the ascendance of technology in the investment world.
In his book, The Four, Scott Galloway listed the five largest capitalized U.S. companies in 2006. Galloway then went on to list the five largest capitalized U.S. companies in 2019. The following chart is notable not only in the total dominance of technology stocks in 2019, but also in the Market Capitalization numbers. Except for the inclusion of Microsoft in the 2006 rankings, every one of the 2019 entries had total capitalization amounts larger than every one of the 2006 entries.
Select here for a chart showing the five highest capitalized stocks in 2006 and 2019:
Remember, the capitalization rate is computed by multiplying the shares outstanding by the current market price. Of those two components, the most variable is the current market value. In turn, as demonstrated in the following chart, it can be demonstrated that current market values are driven by actual and anticipated growth in revenues. As the following chart illustrates, the Tech Top 5 in 2019 were increasing their revenues at a far greater rate than the largest capitalized companies of 2006.
Select here for a chart demonstrating how and why the highest capitalized stocks of 2019 have replaced the highest capitalized stocks of 2016:
Stock Market Values in the above chart were taken from the opening price in 2006 and the closing price in 2019. It should be noted that Google did not register annual revenues until 2009, and Facebook didn’t until 2012.