Factors for Trillian Dollar Companies

2882 words (12 pages) Business Assignment

13th May 2020 Business Assignment Reference this

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TABLE OF CONTENTS

1.0 INTRODUCTION

2.0 BEING A MEGA COMPANY

3.0 SIGNIFICANT ASSESSMENT

4.0 COMPANY VALUATION

5.0 MILESTONE.

6.0 THE NEXT TRILLION DOLLAR COMPANIES

7.0 CONCLUSION

8.0 REFERENCES

1.0 INTRODUCTION

The prefix ‘Mega’ can also be classified as ‘Massive’, ‘large’ or ‘big’. Therefore, a mega company can also be regarded as a ‘large company’. The classification of mega companies varies even though their definition of being a large company over the years varies. Usually, megacompanies pass beyond political boundaries and operate in different countries around the globe. These companies operate using different rules and they act in different ways from smaller corporations and this has led to them crossing lines in order to meet their need for expansion. Prior to this modern age, the method of classifying large companies was sales and income, employment, and the company size. Example of mega companies at those age was General Motors (GM), and the likes of the Dutch East India Company. They were regarded as mega companies because of the amount of revenue they had at the time. However, modern day classification seems to be a bit different from what it used to be. The likes of Amazon, Apple, Unilever, P&G, Nestle, Coca Cola, Pepsi co, Kellogg’s, Johnson & Johnson, and Microsoft has a different classification of being a mega company.

2.0 BEING A MEGA COMPANY

From my point of view, mega company are companies with huge revenue, market capitalization, employment, as well as asset. Although, there seems to be a massive advancement in technology where manpower is being replaced by machines and assets are being franchised. Megacompany could also be when a corporate enterprise is big, and it put survival and growth as its key objectives.

I strongly agree with the conclusion of the New York Times which proclaimed that hitting the milestone of the first trillion-dollar company on the US stock exchange will reflect the rise of powerful megacompanies. The conclusion was a reasonable forecast because more companies tends to rise to become megacompanies. The milestone will now serve as a target for other fast rising companies to meet since the market is a very competitive one. Competitors wouldn’t want a wide distance between them and the first company to reach the milestone. Hence, they tend to work on increasing their market capitalization by increasing revenue and profit. On the other hand, it will be a great achievement to become a trillion-dollar company which will require more efforts and great increase in revenue which might not be so easy to achieve. Even though the rise of these megacompanies could impact on the government and the people positively and negatively.

3.0 SIGNIFICANT ASSESSMENT

Apple Inc. as recorded as the first trillion-dollar on the US stock exchange reached the milestone with it market capitalisation method of valuation. This milestone has been a great achievement for the company as well as to its investors. This achievement has significant influence both positively and negatively on diverse sector in the economy.

3.2 POSITIVE INFLUENCE

  1. Financial Influence: the milestone serves as a positive influence on the economy here because the economy could generate revenue from this company through tax, duties and other government tariffs.
  2. Social Influence: This also serve as a positive influence on the economy, there tends to be social advantages attributed to the economy. Apple as the first trillion-dollar companies will encourage more investment into the economy as well as job opportunities. In addition, there is more opportunities to sponsorships, investment in communities and the likes.
  3. Motivation: Apple as the first trillion-dollar company has one of the characteristics to be motivation to not just other ‘Tech-companies’ but to other fast-growing companies. The milestone gives a hope for other megacompanies to feel the spirit of ‘getting to the point’. The milestone serves as a target of these megacompanies i.e. it creates the belief that “only megacompanies can get to that target”. For this reason, Apple could be justified as a megacompany because other megacompanies look to get to that point.

3.2 Negative Influence

  1. Too big to be handled: This milestone could create a sense of too big to be controlled which is a negative significant to the economy. There could be probably break rules as well as ignore some of the necessities since it could be justified as a megacompany. They also tend to have influence on the economy since there are a good number of employees which will be affected if they go down.
  2. Considering Apple as a megacompany, the fall under the category of companies who stands as giant companies. The tech world has giving so much growth to investors such that investors makes loads of returns from them thereby shrinking the middle class and income inequality. This tends to be a negative impact on the economy.

Perhaps, Apple’s size verifies that huge companies aren’t too big for their own good. For years, companies like Apple have been unfavourably criticized to become uncontrollable growing out to be megacompanies. However, these significances have more positive influence on the economy as well as to other companies since it serves as motivation for the growth of these companies. It also possesses the major characteristics of a big company which for this reason is more justified as a megacompany than not.

4.0 COMPANY VALUATION

Company valuation as a process where the fair value of a company is been determined has different valuation techniques. Generally, the valuation of a company requires analysis of the business asset’s market value, company’s management, capital structure and its future earnings prospects. The tools used for this valuation basically varies among valuators or investment bankers, businesses and industries. However, megacompanies can be valued using the following method:

  1. Time revenue method
  2. Earnings multiplier
  3. Discounted cash flow method
  4. Asset based Method
  5. Market based method

Time Revenue Method

This method of valuation is when a company is valued based on the revenue of the company over a period. This method although has it advantage because it gives an estimate of what the company’s worth is. However, there is a greater risk of over and undervaluation of the company because the revenue of the company can be overstated. For instance, an oil company may be valued at 3x revenue, while a service firm might be valued at 0.5x revenue. Furthermore, other liabilities are not considered in this method of valuation which will lead to a company being over-valued. In addition, this method cannot be used for new companies because they do not have revenues yet.

Earnings Multiplier

This method of valuation is when the earning of the company is being used instead of the revenue. It is observed that the earning multiplier of the company tends to be more reliable than just the revenue method because the profit of the companies will consider some of the expenses as well as losses over time. The con to this valuation is that, it is prone to undervaluation because the expenses must have been taken out leaving companies with revenue method rated higher than companies with this valuation method.

Discounted cash flow method (DCF)

This method is based on the projection of the future cashflow of the company. The cashflow would be discounted to current value and will be used as the value of the business. The difference between the DCF and earning multiplier is the future consideration of cashflow. The con to this method is ‘Uncertainty’. i.e. it could be difficult to project the exact cashflow of the company over the future. This could lead to over or under-valuation of the business when the projected cashflow are not accurate.

Asset Based Method

This could also be a method for valuing a company where the asset of the business is being valued considering the financial statement and other consolidated document of the business. Basically, the net asset method considers the total asset less long- and short-term liabilities which allows to value the company’s equity. This method could also be manipulated since the asset of the business is the determinant of the value of the company. i.e. if the asset of the business is over-valued or overstated, then the business tends to be over-valued.

Market Based method

This is when a company is being valued based on the worth of companies in the same line of production. This method could be used to determine factors such as earnings ratio or revenue figures using historical transactions of the company. The con to this method is that, if the company used by the valuator (investment banker) is being over- or under-valued, then the company being valued follow the same trend.

The above methods are being used to determine the share price of the company being valued. However, to determine the market capitalization of a company (which shows the company’s worth in monetary figure) the company’s share price will be multiplied the number of shares outstanding. E.g., as at January 3, 2018, Microsoft Inc. share price was $86.35 with a total number of outstanding shares of 7.715 billion, the company was then valued at $86.35 x 7.715 billion = $666.19 billion. Although company valuation is not limited to the ones mentioned above. i.e. there are more ways a company can be valued because there is no definitive way of valuing a company. The reasons for valuing a business also differs from another. E.g. Sales of the business, establishment of partnership, legal reasons, divorce proceedings and the likes of others. Considering these, different investment banker or valuation comes up with the best way in their opinion to value the company.

5.0 MILESTONE

The US stock exchange recorded Apple as the first trillion-dollar company after its record-breaking financial quarter. However, there are companies how have been valued more than a trillion yet was not recognised as the first trillion-dollar companies due to reasons like inappropriate funding, non-trading on the US stock market and non-compliance with US GAAP. Examples of these companies out of others are PetroChina and Aramco. In the same vein, considering inflation, there are also companies who have been worth a trillion dollar. Examples of these companies are Southsea company (1720), Mississippi company (1720), the Dutch East India company (1637) and the likes of others. These companies are supposed to be worth more than a trillion if inflated to today’s valued. Furthermore, considering other valuation method such as the asset-based method, market based or the discounted cashflow method, Apple would not have been the first company to hit the milestone. There could have also been a push-up technique to hit the milestone thereby overestimating its revenue to meet the valuation process.

In respect to these considerations, I do not agree that Apple is the first company to be worth a trillion dollar. I believe that there is a higher possibility of Apple being overvalued.

6.0 THE NEXT TRILLION DOLLAR COMPANIES

Although Apple and Amazon are companies with a trillion-dollar value, I am therefore of the opinion that the following companies are the next five to be valued as a trillion-dollar company.

  1. Alphabet Inc: Considering information and its needs to human, there has been more increase in the need for information most especially in the world today. There is also a higher tendency for information in the technology world. This has impacted in the growth of this company over time and a projection that there will be increase demands. Also considering the acquisition and expansion of this company, it is increasing improving the net worth of the company. As at Nov 1, 2018, the company which have a market cap of $720billion compared to the market cap today, it is now worth $829billion (Yahoo Finance, 2018). I strongly believe that this company of the next trillion-dollar companies.
  2. Berkshire Hathaway: This holding company which is into diverse trading activity amongst which is investing will be recommended as one of the next trillion-dollar company. Considering the growth of this company over the years, as at a year ago, the company was valued at $496billion but now it is about $504billion. Over time with the pace of expansion, the company is seen to worth a trillion dollar.
  3. Facebook: The increasing need for technology and relationships has been a platform for the projection that the company will be one of the next trillion-dollar company. Although sometime a year ago, there has been quite a fluctuation in the net worth of the company due to drop in the share price. However, the increasing growth of information and relationship with families and friends over a distance will never seize. This symbolizes that over time this company tends to grow more than it is right now. Considering the growth in the market value of the company over five years, it has been a great increase of about 57.8% increase. This shows that over time, there seems to be an increase in the market value of this company.
  4. Exxon Mobil: The need for companies like this still exist in the world i.e. the supply of energy remains one of the things that would not be wiped out rather there will be need for more. The growth of this company over the years has led to the project of being one of the next trillion-dollar companies even though there have been fluctuations over the years. However, the company is worth $305billion as at August 1, 2019 which has been a drop in its market cap at its peak in 2014, yet I strongly believe that the company has a higher probability of growth over the next 4-8 years.
  5. Johnson and Johnson: Compared to previous years, people now pay more attention to the body, skin and their health. This seems to increase over time because these people will need to maintain this trend which will bring increasing success of this company. There has been an increasing growth of approx. 78% in the share value of the company in the last 5 years. This trend has a higher probability to increase thereby moving this company toward becoming a trillion-dollar company. My projection is that in the next 3-6 years, this company will be closer to be a trillion-dollar company if not one yet.

7.0 CONCLUSION

The milestone has been reached an has brought more of motivations for other companies as well as positive influence on the economy. However, there should be a control to the negative threat it brings. In addition, a more suitable and stable valuation method should be considered so to reduce the possibilities of over- and under-valuating companies. Categorically, the recommendation above about the next trillion-dollar companies should be watched out for.

8.0 REFERENCES

  • Brumley, J. (2018) ‘What’s the Significance of Apple’s $1 Trillion Valuation? More Than You Realize’, InvestorPlace, 3 August. Available at: https://investorplace.com/2018/08/whats-the-significance-of-apples-1-trillion-valuation-more-than-you-realize/ (Accessed: 4 August 2019).
  • Gershgorn, D. (2018) Apple just became America’s first trillion-dollar company, Quartz. Available at: https://qz.com/1345748/apple-just-became-americas-first-trillion-dollar-company/ (Accessed: 11 December 2018).
  • Irish examiner (2018) Apple’s $1 trillion value doesn’t mean it’s the ‘biggest’ company. Available at: https://www.irishexaminer.com/breakingnews/views/analysis/apples-1-trillion-value-doesnt-mean-its-the-biggest-company-867306.html (Accessed: 10 December 2018).
  • Yahoo Finance (2018) RDS-A : Summary for Royal Dutch Shell PLC Royal Dut – Yahoo Finance. Available at: https://finance.yahoo.com/quote/rds-a/ (Accessed: 11 December 2018).

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