Market Cap Matters

Investment Analysis Clubs Saul’s Investing Discussions
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This is not a screen – these are the top publicly traded companies in the world (by market cap), and also where some of our companies rank. All market caps and ranks are approximate and I’m sure this leaves out some large companies on non-US exchanges. But I believe there are several things we can glean from this:


Approx
Mkt Cap Rank	Company

2,486	1	Apple
2,177	2	Microsoft
1,866	3	Amazon
1,828	4	Alphabet (Google)
1,056	5	Facebook
638	6	Berkshire Hathaway
634	7	Tesla
599	8	Taiwan Semiconductor
539	9	Alibaba
534	10	Visa

360	17	Paypal
245	27	Oracle
229	34	Salesforce
227	36	Netflix
200	**48	Shopify**

120	~100	Snap
119	~100	Square
116     ~100    Zoom
115	~100	ServiceNow

69	~170	Twilio
64	~200	Docusign
63	~200	Crowdstrike
38	~350	Datadog
36	~350	Cloudflare

12	~800	Upstart
11	~900	Lightspeed

There are only about ten 500b+ companies in the world (again this may leave out some non-US public companies, and some private companies – but it gives a rough but fairly accurate sense of how rare this is).

Some of our companies have become quite large. Shopify is a top 50 company now. Crowdstrike and Docusign are top 200.

What does this mean? Well, it’s obvious that Shopify will have a hard time 10x-ing from here. It would have to become pretty close to the top company in the world. But a double or triple or more isn’t so hard to imagine, because they are only 10% the size of Apple, after all. And all companies that aren’t dying are actually growing over time, so there will be more trillion dollar companies in the future than there are today.

Our companies are still relatively small compared to the giant enterprises of our day. Especially little Upstart and Lightspeed – With almost 1,000 companies being larger than they each are, that’s a lot of room for growth! Of course, they have to do the things (e.g. grow their revenues) to become larger over time.

Anyway, this is mostly a reminder – many of you know this like the back of your hand. But if you don’t, I encourage you to learn it. This is the stock market 101, and yet I encounter investors who don’t understand it. Market cap is the price at which we buy companies. The share price at which we execute the trade is just a derivation (based on how many shares are outstanding).

It’s important to understand where we are. It won’t tell you where we’re going, but at least it can give you a clear picture of reality.

Here are a few other posts I’ve done on Market cap:
https://discussion.fool.com/market-cap-thinking-34004504.aspx The first in the series – look how tiny things were back then!
https://discussion.fool.com/the-key-est-numbers-34077907.aspx Market cap and Revenue…boy I was wrong about New Relic (NEWR)
https://discussion.fool.com/market-cap-example-wix-34282764.aspx… An example
https://discussion.fool.com/market-cap-thinking-pt-2-34568635.as… A more recent update

Bear

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Bear,

Of course market CAP matters but not just because it’s a big number in a vacuum. It’s like saying elephants are too big and ants too small so ants can grow more than elephants.

Growth depends on servicing markets and the rate of growth tends to follow the “S” curve. But it’s not a company “S” curve but a technology “S” curve. Take Apple, it has several “S” curves, computers, iPods, iPads, iPhones, watch, TV, the retail Apple Stores, the online store. It’s the collection of markets that has allowed Apple to grow so big. When they run out of markets growth will slow.

Amazon has become a conglomerate with all sorts of profit centers like air freight. Berkshire Hathaway is another conglomerate that puts all their spare cash into new businesses instead of paying dividends or buying back stock. Each company has a way of growing by either conglomerating or finding new markets to serve with new products.

One of the biggest mistakes people make is not believing there are markets to serve, like Thomas Watson Sr. saying that there might be a need for five computers or the Telco that didn’t buy into the cellphone business because there was a market for maybe 50 thousand cell phones. This reticence is understandable when markets are new and untested but some markets are more visible than others.

The issue really is that when a company has no new markets to serve it will grow into its valuation of xyz P/E ratio and the stock price will be goverened by the dividend payment but a company with wide open markets can continue to grow until it runs out of markets to serve. One interesting growth story, now private, is ARM Holdings. They started out servicing small mobile electronics, they now power Apple’s computers and even servers.

It’s available markets that count. At one time oil companies were the biggest market CAPS, no longer, now digital is worth more than fuel.

Denny Schlesinger

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Berkshire Hathaway is another conglomerate that puts all their spare cash into new businesses instead of paying dividends or buying back stock. Each company has a way of growing by either conglomerating or finding new markets to serve with new products.

Ooops:
https://seekingalpha.com/news/3709997-berkshire-hathaway-app…

Berkshire Hathaway (NYSE:BRK.B) (NYSE:BRK.A) appears to have repurchased ~$6.5B of its shares so far in Q2, after buying back $6.6B of repurchases in Q1 2021, the Associated Press reports, citing a recent SEC filing and an analyst report.

The filings made by billionaire Warren Buffett, when he donated $4.1B of Berkshire stock to five foundations, showed that Berkshire has fewer shares outstanding now than it did when it filed its Q1 earnings report, according to Edward Jones analyst Jim Shanahan.

Berkshire has been using some of its massive cash pile to buy back shares as the investing behemoth has had difficulty finding a large acquisition at the price it’s willing to pay. As of March 31, 2021, Berkshire had ~$145B of cash, equivalents, and short-term investments on its balance sheet.

“We can’t buy companies’ stocks as cheap as we can buy our own,” Buffett said at the company’s annual meeting in May.

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Ooops:

is the exception that proves Warren Buffett’s rule.

“We can’t buy companies’ stocks as cheap as we can buy our own,”

Buffett is no mindless robot. LOL

Denny Schlesinger

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“We can’t buy companies’ stocks as cheap as we can buy our own,” Buffett said at the company’s annual meeting in May.

Well, great as Buffett is, he’s very much a man of his time and completely missed out on technology companies, especially software. By the time he got into IBM it was already on the decline. By the time he got into Apple, its high growth days were over and done.

If Buffett can’t find good largish companies to buy, I think that’s because he’s not able/willing to recognize what makes “good companies” today.

That said, a few years ago Buffett said that with a “peanuts” portfolio of $1 or $10 million he could “make 50% a year.” (https://www.gurufocus.com/news/781428/i-think-i-could-make-5… )

“If I was running $1 million today, or $10 million for that matter, I’d be fully invested. Anyone who says that size does not hurt investment performance is selling. The highest rates of return I’ve ever achieved were in the 1950s. I killed the Dow. You ought to see the numbers. But I was investing peanuts then. It’s a huge structural advantage not to have a lot of money. I think I could make you 50% a year on $1 million. No, I know I could. I guarantee that.”

The article does point out that Buffet never made 50% in a year. His point is well-taken, though, and Buffett has in the past talked about the kind of investing concentration practiced here. But, I still think Buffett would continue to suffer from his avoidance of tech.

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Bear,

I think that people underestimate how much market cap can grow. Look at the numbers Apple (#1) up 36%, and Alphabet(#4) up 62%, put up today. They are still growing a lot. The biggest market caps used to be oil companies, they are way down the list now others grew past them. What if Shopify ultimately grows past Amazon, helping other businesses (the AWS part) run more easily and cost effectively is a great business. I don’t think I can predetermine how these companies can grow. I monitor the growth, when it ends I will see it but why second guess it.

Yes it is great if you can find a sub 20 billion company and ride it for a long time. But as long as customers pay for what our companies are selling, great.

I am just saying - why guess when you can just measure.

Flygal

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By the time he got into Apple, its high growth days were over and done.

He first bought AAPL in 2016, 5 years ago. 10m shares, I think.
Shares were about $26 then, and $146 now.
That is a 40% CAGR the past 5 years.

The CAGR on owning AAPL stock in the 5 years before Buffett bought (2012-2016) is about 3%.
The CAGR on owning AAPL when iPhone came out for a 5-year period, from 2007-2012, was 35%.

Looks like Warren knows what he is doing.

Doom

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He first bought AAPL in 2016, 5 years ago. 10m shares, I think.
Shares were about $26 then, and $146 now.
That is a 40% CAGR the past 5 years.

The CAGR on owning AAPL stock in the 5 years before Buffett bought (2012-2016) is about 3%.
The CAGR on owning AAPL when iPhone came out for a 5-year period, from 2007-2012, was 35%.

The 2nd one should have been 2011 to 2016, for 5 year comparison. That was 14% CAGR.
Either way, you get the idea. Warren appears to have gotten in at an ideal time.

Not that I agree that Apple deserves their market cap.
Bear’s original post from 2018 is startling to see how much smaller those companies are.
Which further proves that stock price growth has been driven not just by company rev/profit growth, but by multiple expansion.

The real question should probably be, are those multiples sustainable?
If the multiples revert to 2018 or 2019 levels (not the stock price…the multiples) then the market cap will likewise contract with it.

Doom

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I was recently reviewing the current average market cap of my portfolio last year to where it stands today and it is pretty shocking to see. Our companies have imploded in value over the last 12 or so months. Sure, companies have reported incredible growth but their multiples are expanding along with them. As Chris Mayer describes in his book 100 Baggers, these are the two twin engines needed for huge returns in the stock market - revenue/earnings growth coupled with multiple expansion. We’ve been lucky to see this unfold for our stocks recently.

Upon comparing my portfolio side by side from July 31, 2020 to today, I have gone from 16 stocks to 12. The average market cap in my portfolio last year was $30B. Today, the average market cap for my entire portfolio is $66B. I have been wrestling with this fact lately. Of the 16 stocks I owned last year, ten are still with me. I have only added two new stocks YoY - Upstart and Snowflake - one small and one large business.

Here’s a look at how those ten have grown over the last year. They are listed beginning with the largest position in my portfolio to the smallest.

Crowdstrike - CRWD
July 2020 MC: 24B
July 2021 MC: 58B

Sea Limited - SE
July 2020 MC: 57B
July 2021 MC: 142B

The Trade Desk - TTD
July 2020 MC: 21B
July 2021 MC: 39B

Roku - ROKU
July 2020 MC: 19B
July 2021 MC: 61B

Cloudflare - NET
July 2020 MC: 13B
July 2021 MC: 36B

Zoom - ZM
July 2020 MC: 72B
July 2021 MC: 108B

Peloton - PTON
July 2020 MC: 19B
July 2021 MC: 34B

Square - SQ
July 2020 MC: 57B
July 2021 MC: 115B

Datadog - DDOG
July 2020 MC: 28B
July 2021 MC: 34B

MercadoLibre - MELI
July 2020 MC: 56B
July 2021 MC: 79B

I found it pretty insightful to compare their market caps as it is tough to get a full grasp of the business if you simply look at their stock price return YoY. Looking at their market cap helps me better understand their growth runway, for the business and the stock. It also makes me wonder why I did not buy more Roku or Cloudflare at those prices! And also, maybe that I will be saying the same thing next July about Datadog considering its value has not increased nearly as much as the other businesses, yet the actual underlying business has been performing quite strongly.

Normally, when I go shopping to deploy cash in the stock market, I generally buy more of something I already own. However, recently I have not felt like there is a big opportunity at these prices within my portfolio aside from Upstart which I have been buying heavily the last few months. In addition to this, I am having a hard time finding new businesses I find very appealing that I think are trading at a reasonable valuation. I initiated a small position in Snowflake, but am having a hard time growing it from a small position because I think one of its two engines (multiple expansion) are down.

Bear, last year you posted the question "Do you have any companies that you feel could be a lot larger in the next few years? Please tell us about them. Why do you feel that they could be larger? For instance, are they growing revenue extremely rapidly? At the time, I responded with Peloton which turned out well. Now, fast forward a year later, and I would like to ask the board the same question. I have reviewed several companies but apart from Upstart, I am stumped. Any thoughts?

Rex

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Normally, when I go shopping to deploy cash in the stock market, I generally buy more of something I already own. However, recently I have not felt like there is a big opportunity at these prices within my portfolio aside from Upstart which I have been buying heavily the last few months.

I happen to think that TTD’s market cap still looks reasonable value given that its TAM (Advertising) at nearly $1trillion is one of the largest out there besides (e)commerce and finance/payments and is still growing. I was happy to add to it recently when the share price crashed.

Global e online is another small market cap high growth company that should outgrow Shopify within the same domain and I was happy to divert 5% of my Shopify into it in the belief that it would outgrow even if the TAM is lower.

Rex and Bear - this is exactly why I have started monitoring market cap and TAM penetration in my monthly reviews. I am concerned by how much out portfolio companies have grown to become too large to grow meaningfully before hitting the wall and facing massive multiple contraction as either their growth slows down or their TAM runs out. Of course with today’s global SaaS businesses TAM’s could be higher than ever before and market caps could reach higher levels than ever before but:

As Denny says unless they can add new products and new markets
As Flygal says unless the terminal growth of the end market TAM allows continued growth in market cap

…then we run the risking of share prices and multiples correcting and growing into their valuations for all the wrong reasons than right reasons.

I’m happy to believe that Shopify still has the potential to 10x (and Amazon to 2-5x) due to the size of the ecommerce TAM, that TTD and still has 10x potential in a huge TAM that it is still a relative junior size in and that Datadog might have market cap expansion capacity but for all the others we need to see new products and new markets to allow 60-100bn valuations to continue expanding (optionality). We see this with Crowdstrike, Elastic and to a degree Cloudflare as well as MercadoLibre and SEA.

Of course the odd one out in all of this is Snowflake which has a massive market cap and puts up hitherto unseen growth rates but is valued on the basis of a relatively unknown TAM and business model and is really testing the faith in the future with its valuation.

Ant

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I am just saying - why guess when you can just measure.

Hi Flygal - Good point.

Whilst looking at Bear’s past posts, clearly looking at market cap hasn’t proved Bear right too often in his interest considerations; (fortunately he does exceptionally well when evaluating individual company growth performance and potential - Bear it would be interesting to look at where you are getting it right and wrong both in the large cap and small cap thinking); however the reason why I would would be looking at this now when I wasn’t really interested to just a few years ago is because:

  1. Back then our companies were much smaller and revenues at early stages and hadn’t scratched the surface of the market opportunity

  2. Valuation multiples weren’t so stretched that if we picked the wrong horse the downside would either happen less dramatically (as revenue growth was generally in the earlier stages of the S curve and wouldn’t screech to a halt dramatically as the runway ran out); or because the penalty for failure in multiple compression wouldn’t have been so severe.

Having said that, I don’t hear Saul worry about this but then again we have never really faced these levels of multiples or even invested in these sized companies for growth in the past.

Ant

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Loved the post, Rex: https://discussion.fool.com/i-was-recently-reviewing-the-current… And contrary to what Ant said, your numbers show what I predicted. If we sort by the companies that were largest last year to the smallest, we see that the smaller companies are up more.

The larger companies

Zoom - ZM
July 2020 MC: 72B
July 2021 MC: 108B
Up 50%

Square - SQ
July 2020 MC: 57B
July 2021 MC: 115B
Up 102%

Sea Limited - SE
July 2020 MC: 57B
July 2021 MC: 142B
Up 149%

MercadoLibre - MELI
July 2020 MC: 56B
July 2021 MC: 79B
Up 41%

Much Smaller Companies

Crowdstrike - CRWD
July 2020 MC: 24B
July 2021 MC: 58B
Up 142%

The Trade Desk - TTD
July 2020 MC: 21B
July 2021 MC: 39B
Up 86%

Roku - ROKU
July 2020 MC: 19B
July 2021 MC: 61B
Up 221%

Peloton - PTON
July 2020 MC: 19B
July 2021 MC: 34B
Up 79%

Cloudflare - NET
July 2020 MC: 13B
July 2021 MC: 36B
Up 177%

Even the large companies that have done amazingly (SEA and SQ) didn’t do as amazingly as the smaller ones (NET and ROKU). And while the large companies grew on average by an incredible 85.5%, the smaller ones grew an incredible 141% on average. Giant Shopify also grew less than 100% over this time – from 111b to 200b.

I did remove Datadog as an outlier (and, not for nothing, I called it expensive one year ago in this post: https://discussion.fool.com/market-cap-thinking-pt-2-34568635.as…). But even if we include its tepid 21% growth, the smaller companies still average 121%.

I don’t want to belabor this point. It’s not like all small companies will do well. Of course not! It’s about what it takes to grow at scale – for a SaaS business, getting from 100m to 500m in revenue isn’t particularly difficult. How do I know? We’ve seen it over and over! How many will make it to $5b revenue? We’ll see in time.

Bear

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“…Upon comparing my portfolio side by side from July 31, 2020 … The average market cap in my portfolio last year was $30B. Today, the average market cap for my entire portfolio is $66B. I have been wrestling with this fact lately…”

So? If your companies doubled their revenue then this is fine (even giving some “multiple expansion”, which is probably deserved if they really doubled in a year and could do so again.) what I am trying to point out here is that no context was given to bring value to the work.

Read your post again. It is 100% about price without any context from business performance. No wonder you wrestle with this stuff. It is all irrelevant and trying to figure it out is like spinning tires in mud. You burn fuel and get nowhere.

Bear’s point about market cap is an interesting consideration to me but one of many and not the greatest. I agree it is worth thought, but primarily as an exercise to better understand each company’s TAM size and growth potential and to test my overall conviction.

“… Do you have any companies that you feel could be a lot larger in the next few years? Please tell us about them. Why do you feel that they could be larger? For instance, are they growing revenue extremely rapidly? At the time, I responded with Peloton which turned out well. Now, fast forward a year later, and I would like to ask the board the same question.

Every single one. I don’t recall the original context but the questions seem Rhetorical. Why would any of us invest in companies that are not going to get bigger? Growing revenue rapidly is a staple of the businesses discussed here. If you have a new idea, please write it up. I’m always happy to read about new ideas!

Sorry if this reply comes off as picking on your post a bit. I suppose It does, but only to counter with what I’m seeing as this illustrates a fundamental change to my own thinking the last year and a half or so. It reads as off-topic to me these days.

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It is all irrelevant and trying to figure it out is like spinning tires in mud. You burn fuel and get nowhere.

Rafe, I disagree. What I got from Rex’s post was that the larger companies really did grow slower. I think the fault is mine – I probably didn’t offer anything actionable. As Rex says, and you say, what do we do? What companies should we look for which will grow the most?

As you say, “every single one” of the ones we invest in. I agree. I just think we need to realize they might not have as much runway ahead of them as they used to, and be vigilant in finding new companies when we can (like Upstart and Lightspeed – big thanks to ethan1234 for bringing the latter).

There will be exceptions. Microsoft and Google are growing their cloud businesses 50%+ YoY at a scale that is many billions of dollars per year. That’s awesome. Not all businesses will be able to do that, of course. Maybe Crowdstrike and others can maintain hypergrowth longer than anyone expects. Docusign is more in the 50% range than the 70%+ range, but it has an even larger revenue base and so that level of growth is quite impressive.

Anyway, let’s close this thread unless anyone has any revelatory ideas. I don’t want it to get off topic or try to be more than it is: just a reminder that market cap matters. I hope we can find some more 10 to 20 billion dollar companies that are worthy – growing fast with longevity and good financials!

Bear

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