Price/Disruption Ratios Are A Thing Now

By in
Price/Disruption Ratios Are A Thing Now

In our Markets section 2 nights ago we mentioned that Amazon is responsible for 6.7% of the S&P 500’s market value gain since November 2005. Amazon was added to the index in the that month, and since then:

  • The value of the companies in the S&P 500 has risen by $13,161 billion.
  • Amazon’s market cap has increased by $886 billion
  • Divide the two figures and you get 6.7%

That got us to thinking: how much have large Tech companies influenced the S&P 500 over just the last 5 years? Here are a few baseline numbers to start the analysis:

  • At the end of March 2014, the S&P 500 had a total value of $17,206,453 million.
  • At the end of March 2019, it was $24,760,982 million
  • The difference: $7,554.5 billion, or 43.9% higher
  • One technical note: the S&P 500 is +51.3% over this period with the difference due to stock buybacks.

So how much of that $7.6 trillion comes from Apple, Amazon, Facebook, Google, Microsoft and Netflix? Here are the numbers:

Amazon: 10.1% of the market’s value gain over the last 5 years:

  • Market cap Q1 2014: $157.4 billion
  • Market cap now: $917.6 billion
  • Difference: $760.2 billion

Apple: 6.5% of the market’s gains over the last 5 years:

  • Market cap Q1 2014: $472.1 billion
  • Market cap now: $963.9 billion
  • Difference: $491.8 billion

Facebook: 4.7% of the market’s gains over the past 5 years:

  • Market cap Q1 2014: $157.2 billion
  • Market cap now: $510.5 billion
  • Difference: $353.3 billion

Google: 6.4% of the market’s gains over the last 5 years:

  • Market cap Q1 2014: $375.6 billion
  • Market cap now: $859.5 billion
  • Difference: $483.9 billion

Microsoft: 7.8% of the market’s gains over the last 5 years:

  • Market cap Q1 2014: $343.0 billion
  • Market cap now: $934.2 billion
  • Difference: $591.2 billion

Netflix: 1.8% of the market’s total gains over the last 5 years:

  • Market cap Q1 2014: $21.6 billion
  • Market cap now: $154.9 billion
  • Difference: $133.3 billion

Pulling all this into 3 summary points:

#1: Netflix may not seem all that impressive at “just” $133 billion of added market cap, but that’s essentially what JP Morgan added to the S&P 500 over the same period. JPM’s market cap has increased by $139.1 billion in the last 5 years.

Conclusion: disruption at global scale can add as much market value as a much larger but old-school business even if the latter is very well-run.

#2: In aggregate, these 6 companies are responsible for 37.3% of all the S&P’s incremental value creation over the last 5 years. Take out Netflix, and the remaining 5 are still 35.5%.

Conclusion: over a third of the S&P’s 44% value accretion in the last 5 years comes down to a handful of now-super cap tech disruptors. Without them, the S&P’s total value would only have compounded annually at 5.0% instead of 7.6%.

#3: The right question out of this analysis: what will be the source of the S&P’s value creation over the next 5 years (i.e. where is the next $3-5 trillion of market cap coming from)? Here’s how we handicap the odds:

  • 65% chance it will be these same companies. They have the scale and scope to develop the next wave of disruptive technologies and get them to market.
  • 30% chance it will be either new businesses (such as the raft of IPOs currently in the pipeline) or already public Tech companies with a break-through technology or platform. This is why investors are looking so hard at Uber, for example.
  • 5% chance it will come from a strategic shift in non-Tech companies to incorporate disruptive business models at scale. The challenge here is the Innovator’s Dilemma – established businesses rarely burn their boats and strike off into the wilderness.

Final thought: remember that we only highlighted 6 disruptive Tech companies here and still got to 37% of all the value creation for US stocks over the last half decade. Add another dozen or two and we suspect we could get to well north of 50%. The US stock market, or at least the S&P 500, is inextricably tied to the present and future of disruptive technology. We don’t see that changing.