The VERY Long View: The Biggest TMT Companies for 2025

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SEE LAST PAGE OF THIS REPORT Paul Sagawa / Artur Pylak

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December 29, 2015

The VERY Long View: The Biggest TMT Companies for 2025

Of the top 10 US TMT companies by market cap today, just 5 were on the list a decade ago. AAPL, AMZN and FB were nowhere to be seen, and GOOG had just edged onto the list at #10. Meanwhile, MSFT leads the list resilient enough to stay near the top, while CSCO and IBM fell off of the list, down from numbers 2 and 3 in 2005. How will the list change between now and 2025?

  • About half of the top 10 TMT stocks churn every decade. Of the top 10 US TMT stocks by market cap at the end of 2005, just 5 are on the list today – GOOG, MSFT, T, VZ, and INTC. MSFT, T, VZ and INTC have all inhabited the list for 15 years, with MSFT, INTC and T each going back more than two decades. IBM may be the all time TMT champ, having only fallen out of the top 10 a year ago after 50+ years at or near the top.
  • The top five all look likely to stay on the list. AAPL, GOOG, MSFT, AMZN and FB are the five largest US TMT companies today, and all have huge established platforms that appear very likely to remain relevant for the coming decade. The next five, T, VZ, DIS, INTC, and ORCL all face major strategic challenges that demand action, if they are to stay high on the list. Of these, we believe DIS, with its tent-pole content franchises, stands the best chance of finding an answer.
  • Several companies are on trajectory to challenge for the top. NFLX shares, up 140% for 2015 to a $50B valuation, is a strong candidate for 2025. CRM, up a third YTD, is another. Investors are split on $30B TSLA, but Elon Musk dreams big. We are not confident about big cable’s ability to maintain broadband dominance, but CMCSA and its investors are. On the flip side, we are bullish outliers about TWTR, although it’s a big stretch to see it as cracking the top 10. LNKD is clicking along, but is a bit too narrow to be top 10. Finally, the perpetually “just around the corner” IoT market will likely be real by 2025 – will a chipmaker like QCOM or AVGO be able to exploit that big potential market?
  • How about a Unicorn? With the huge population of private companies with $1B+ valuations of $1B, some of them will likely emerge as contenders. Uber is obvious , already valued at $60B+. Short term sublet pioneer AirBnB and security data analytics leader Palantir each carry private valuations of greater than $20B. Secretive Magic Leap has financing at a modest $2B valuation, but, if the buzz around its augmented reality tech pans out, it could be huge. Cloudera and Docker are ambitious enterprise IT cloud technology plays. Slack is a red hot enterprise messaging and collaboration cloud application.
  • Drumroll Please. We expect GOOG, AMZN and MSFT to be the top 3 in 2025, with AAPL holding on for 4th place, just ahead of Uber, FB and NFLX. M&A will likely play a significant role in determining the last 3 – a IoT chip roll-up, or an enterprise SaaS/cloud tools play seem strong possibilities. In that context, we will put CRM on the list, even though we see some near term issues. We think DIS may have recovered from the ESPN pain by 2025. The last name is a flyer, but let’s go with Magic Leap.

Who Will Lead Us

There is a rhythm to the changing tides of TMT leadership. Decade to decade, about half of the companies on the list of highest US market caps drop out, replaced by new blood. Of the current list, Alphabet, Microsoft, Verizon, AT&T and Intel were top 10 companies in 2005, with the latter four on the list in 2000, and with Microsoft, AT&T and Intel each with more than 20 years tenure (Exhibit 1-2). IBM fell out of the top 10 just two years ago, ending a more than 50 year run on the TMT top list.

Exh 1: Top 10 TMT Companies by Cap, 1985-2015

Exh 1: Top 25 TMT Companies by Cap, 2015

Meanwhile, save for number 3 Microsoft, the top 5 slots on the current list are relative new comers. Apple has a proud legacy, but it never cracked the top 10 until the iPhone had been verified as a game changing phenomenon. The then Google had just barely poked its nose into the bottom of the list in 2005 – it has grown its market cap by more than 6x in the last decade. Amazon was founded in 1994, but it didn’t crack the top 10 until 2010, nearly quadrupling its value since then. Number 5 Facebook is just three years removed from its IPO. Number 8 on the list, The Walt Disney Company, has a proud 90-year history but is a recent entrant to the top 10 club after executing on Bob Iger’s prescient strategy of building tent-pole content franchises.

Looking far ahead to 2025, which of these companies will still be amongst the TMT leaders and which will fall off of the list? Which new companies will rise to join the party?

The Old and Tired

There is a raft of large cap TMT companies whose best days are behind them. Shackled to old technology architectures and business models and no longer able to attract the best and the brightest employees, these proud companies soldier on, clinging to customer lock ins, acquiring startups, and loudly proclaiming their relevance to the new era.

We are not believers. IBM is hemorrhaging the talent that it hadn’t already downsized, and Softlayer is just too small to compete with the likes of AWS or Microsoft Azure. Oracle is trying to wish its jury-rigged morass of acquired software over to the cloud and to convince its disgruntled customer base not to take advantage of a platform change to ditch their onerous maintenance contracts for once and for all. Cisco is facing a tough future with enterprise traffic shifting onto cloud platforms that don’t buy its routers or security products. We don’t think that Intel can stay in the top 10 riding the x86 horse for another decade, and without a major merger (QCOM? AVGO?) expect it to fall out.

Verizon and AT&T are trying to perpetuate duopoly rents while barriers to switching melt and an aggressive T-Mobile is harvesting market share. Once cash flow yields drop enough to threaten those 5% dividends, the big two wireless carriers will fall off of the list. Comcast would have made the list for 2015 if its Time Warner Cable merger had been allowed, but linear TV will be near dead by 2025 and regulation/competition will stop Brian Robert’s dreams of an evergreen broadband monopoly. Sorry.

The Up and Comers

There are a number of companies on the second and third pages of the 2015 TMT list that are looking to grow their way into the top 10. Netflix, up more than 100% in 2015 to a $50B market cap, seems a shoo-in. Salesforce, also with a $50B cap, could be a good bet IF it resolves its dependence on its uncompetitive private data center infrastructure while rolling up promising smaller SaaS players. Tesla has always been intriguing, although new electric car competition is gearing up and investors are growing skeptical. LinkedIn has a great business model, but HR seems too narrow a focus for a would-be top 10 stock. We like Twitter, even if no one else does, but top ten seems out of reach even to us. On-line travel agent Priceline has a $65B market cap, 10% sales growth and 35% operating margins, but we are very concerned with the sustainability of their middle man role. Even after a very difficult 2015, Qualcomm still holds in the top 15 TMT companies – some M&A could get it into the top 10 over the next decade. The same is true for Avago, which is plumping itself to a likely $70B market with its pending acquisition of Broadcom.

In this unicorn-rich environment, it seems more than possible that the 2025 top ten list will have companies that are still private. Society changer Uber, already valued at better than $60B in the private market, is a no brainer. Fellow sharing economy icon AirBnB carries a $25B valuation of its own, but we have doubts that the business could scale to be one of the ten most valuable TMT names by 2025. $20B Palantir developed the high-performance data mining software that the CIA used to find Osama bin Laden, and has found a strong market with financial firms as well. Snapchat has a $16B implied valuation, valuing it more highly than Twitter despite having a third fewer MAUs, a quarter as many unique visitors, and about 92% less revenue than its oft criticized rival. One of the brace of cloud tech companies, like Cloudera or Docker, could break out, although we fear that proprietary solutions from the likes of AWS, Azure and Google will crowd them out. Similarly, a SaaS application company, like Slack, could be a surprise winner. Finally, we are intrigued by super-secret augmented reality developer Magic Leap.

Our 2025 Top Ten Predictions

10: Magic Leap (2015 cap ~$1.2B, estimated 2025 cap ~$175B) – Magic Leap is the most elusive of unicorns, hiding under heavy security and non-disclosure agreements in a former Motorola factory in Florida. A relative handful of investors, led by Google and including Qualcomm, Kleiner Perkins, Andreeson Horowitz, KKR, and Obvious Ventures, have been let inside, and Google’s CEO Sundar Pichai sits on the company’s board. A demo video, recently released by the company, reveals a product that can superimpose computer generated 3D images over a person’s field of vision, supposedly by projecting them directly onto the user’s retina. The company suggests that its technology could be used for all of the functions of a smartphone, while enabling a whole new class of applications. If so, Magic Leap might be the basis for the next revolution in personal computing.

9: The Walt Disney Company (2015 cap $177B, 2025 cap $190B) – Disney has an ESPN problem. The sports network, which generates about 25% of the company’s operating profit, faces a long term squeeze that will be very painful, but it should be largely over by 2025 (Exhibit 3). Meanwhile, the franchise content strategy has been played expertly, and should pay off handsomely in box office receipts, studio programming sales, consumer products, and theme parks.

Exh 3: Select Financials – DIS

8. Salesforce (2015 cap $53B, 2025 cap $200B) – M&A will determine at least one spot on the 2025 list – many emerging categories seem ripe for consolidation. Salesforce, with Oracle’s genes deep in its blood, could look to acquire its way to the top of the enterprise software market (Exhibit 4). That is, if it is not acquired itself by a IaaS cloud platform player, like Amazon or Microsoft, with its own eyes on domination. We also wouldn’t be surprised to see Qualcomm, Avago or Intel as agents of consolidation in semiconductors, possibly landing them in this slot instead of Salesforce.

Exh 4: Select Financials – CRM

7. Netflix (2015 cap $51B, 2025 cap $250B) – Netflix is growing its subscriber base at a roughly 30% pace, despite having executed an 11% price boost earlier this year (Exhibit 5). Importantly, Netflix has also nearly doubled the amount of original programming it offers to its subs, using its copious data on user preferences to inform its greenlight decisions. There is a lot of runway for Netflix growth – new international markets, greater penetration in the markets it serves, future price hikes, possible premium content tiers, live event streaming, advertising supported services, and other monetization levers.

Exh 5: Select Financials – NFLX

6. Uber (2015 cap ~$62B, 2015 cap $425B) – Uber addresses a HUGE market (Exhibit 6). By 2025, expect it to be running fleets of autonomous electric vehicles offering rides and deliveries at much lower cost than it can today. Uber subscriptions will spur consumers to give up car ownership entirely, dramatically expanding the addressable market to the tens of trillions of dollars spent worldwide on owning, maintaining and operating personal vehicles. The only company really positioned to compete is a bit further up the list.

Exh 6: Uber’s Addressable Market

5. Facebook (2015 cap $303B, 2015 cap $400B) – It seems odd to project Facebook as holding serve at #5 between now and 2025, but of the top companies, it addresses the smallest TAM. Facebook may still sign its next billion users, but there are clearly diminishing returns to scale. There is certainly room to grow advertising, and a strong potential to grab a piece of m-commerce along the way, but then again, much of that growth is likely already assumed in Facebook’s current 40.4x forward PE and 19x P/S (Exhibit 7).

Exh 7: Select Financials – FB

4. Apple (2015 cap $606B, 2025 cap $550B) – We may have seen peak Apple (Exhibit 8). The premium smartphone market, where Apple derives the vast majority of its sales and profits, is mature. There may be some further share to gain, there may be some lucrative accessories to add on, and the toll Apple charges for access to its walled garden will continue to be lucrative, but we see revenue growth as elusive and margin pressures as growing. The great hope is that some new product category – in a market large enough to move the needle and open enough for Apple to reinvent – emerges to drive the company. First it was going to be televisions. Then it was going to be watches. Lately, the talk is about electric cars. We fear the answer is none of the above.

Exh 8: Select Financials – FB

3. Microsoft (2015 cap $452B, 2025 cap $700B) – Microsoft had a stunning 2015 for a company that has been on the top 10 cap list for the last 25 years (Exhibit 9). For all of the angst around the presumed demise of Windows and the company’s follies in mobile, the company has rediscovered its mojo. Microsoft is now a cloud company, through and through. Azure is a formidable IaaS platform, number 2 in the market and gaining ground on AWS. The lucrative Office franchise is the poster child for a successful transition from packaged software to SaaS application. Dynamics ERP is a cloud native alternative to old-fashioned ERP software, with the clear advantage of running on a truly world-class infrastructure. We expect Microsoft to participate in the inevitable consolidation of the SaaS application space, with M&A contributing to cap expansion.

Exh 9: Select Financials – MSFT

2. Amazon (2015 cap $325B, 2025 cap $850B) – Amazon addresses tens of trillions of dollars of potential markets, starting with the $18T global retail market, continuing with the $4T global enterprise IT data center market, and on to the $24T global wholesale distribution market. We recently wrote a report detailing its dominance in e-commerce, projecting it as the world’s largest retailer within 5 years (http://www.ssrllc.com/publication/amzn-winning-christmas/). We believe that the underlying profitability of Amazon’s retail business is as much as 8%, far higher than has been reported and obscured by the company’s extraordinary pace of business investment Some of that investment went to build the AWS business, now an $8B/yr business growing at nearly 80% with 25% operating margins and 36% market share (Exhibit 10). Some of it is going to fund an expansion in the huge, lucrative and fragmented B2B distribution business. Some of it is fueling Prime Video, which is becoming a big draw for new members. As time goes by, we believe Jeff Bezos will allow more of the intrinsic profit to flow to the bottom line, if only to keep the stock moving for employee retention.

Exh 10: Select Financials – AMZN

1. Alphabet (2015 cap $540B, 2025 cap $1T) – The reorganization of Google into Alphabet speaks to the company’s ambitions. Google proper, with the core search franchise and all of its extensions, the Android platform, and YouTube, is a revenue growth and cash flow generation machine. We believe the threats to all of these businesses from mobile has been wildly overstated, and indeed see the company as extending its dominance of digital advertising for the foreseeable future. But that’s not all. Through search and Android, Alphabet has a big play in m-commerce, as a counterbalance to Amazon in that multi-trillion dollar market. Alphabet’s 8 year and 1 million mile investment in truly autonomous vehicles makes it a logical rival for Uber in the multi-trillion dollar market for transportation services. Alphabet has the largest and most advanced computing platform on the planet, making it a potential rival for Amazon’s AWS, and fueling work on medical diagnostics, augmented reality (remember that investment in Magic Leap?), robotics, and other areas. In the future, Alphabet’s skill, assets and global reach put it in position to attack nearly anything where digital services could displace traditional business systems. This mastery of all things cloud and the optionality that comes with it positions Alphabet to be the company that finally breaks the $1T market cap barrier (Exhibit 11).

Exh 11: Select Financials – GOOGL

Exh 12: SSR’s Top 10 TMT in 2025

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