Although thoughts of a market crash always loom in the back of most investors’ minds, there were still plenty of opportunities to make a fortune this year. Instead of picking a variety of stocks, you could have grown rich this year on just five. The companies I call Cloud Czars — Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), Amazon (NASDAQ:AMZN), Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) and Facebook (NASDAQ:FB) — are worth a collective $6 trillion as trade opens June 25.
A year ago, this was about $4.2 trillion. That’s $1.8 trillion of value created in one year by five companies. The five were over half the value of the Nasdaq, as of March. It’s almost one-quarter of the New York Stock Exchange’s market cap, and more than any other national market.
Now consider that the oldest of these companies is 45. The youngest, Facebook, is a teenager, founded in 2004.
How is it possible that the whole stock market became dependent on these five young companies?
Blame the Cloud
The reason is in the term I use for them, Cloud Czars. All five of these companies began investing the $1 billion/quarter and up needed to build networks of cloud data centers a decade ago.
Google developed the first clouds in the 2000s to run its search engine. Amazon followed to run its store, innovating in the re-sale of its capacity. Facebook followed even before it had $1 billion in annual revenue. Microsoft joined mid-decade after Satya Nadella became CEO. Apple trailed the move but has been spending heavily over the last five years.
There were over 500 cloud centers at the start of the year, which Synergy Research calls “hyperscale data centers.” About $120 billion was spent on them last year, most of it by just these five companies.
The clouds have transformed the global economy, and all five cloud operators. Amazon is no longer a store, but also the primary wholesaler of computer capacity. Google and Microsoft are the main venues through which business operates. Apple controls the last mile for 20% of the planet. Facebook is no longer a social network. It’s how the world communicates.
How Much Higher
With so much power concentrated in so few hands, it’s natural that governments around the world want to rein it in.
So far, they have been startlingly unsuccessful.
Part of it lies in a misunderstanding of what they’re attacking. Facebook, for instance, sees itself as a common carrier, like AT&T (NYSE:T). You don’t censor phone conversations, and Facebook is reluctant to censor even the most abusive use of its network. Google has become the world’s library, Amazon the world’s marketplace.
Regulators have tried to go after these companies by attacking their ad networks, but it’s their distribution that makes them powerful. It turns out that when distribution becomes free, the value of what’s distributed falls to the floor. Ads and content have the same value, almost nothing, so creators of all kinds are being squeezed in favor of algorithms, which scale better.
By charging for their services, Apple and Microsoft have so far escaped scrutiny. But they’re part of this trend as well. Apple takes a huge percentage of app store revenue. Microsoft has the kind of control over customers Bill Gates could only dream of when the U.S. Justice Department attacked his Windows monopoly in the 1990s.
The Bottom Line on the Next Market Crash
What’s happening in the stock market is that investors have recognized the Czars’ power.
But perhaps it has been over-recognized. This will likely cause the next market crash. Four of the Czars now have price-to-earnings multiples near 30 or higher. Amazon is the exception because it shirks profit in favor of cash flow growth. Its P/E entering trade June 25 was 130.
These levels are historically unsustainable, especially since the revenue of all five Czars, taken together, will be about $910 million this year. At some point there will be a reckoning, maybe when governments figure out a way to rein them in, maybe when investors just look down.
You don’t pay over six times sales for anything indefinitely.
Dana Blankenhorn has been a financial journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Follow him on Twitter at @danablankenhorn. As of this writing, he owned shares in MSFT, AAPL, AMZN and FB.