Breaking up is hard to do...but necessary

It seems as if the House Judiciary Committee in the United States is pushing ahead with its antitrust investigation against Amazon, Apple, Facebook, and Alphabet. The pressure is on to assemble the CEOs of these companies in an effort to put their business practices in the public spotlight. This could turn into the first serious antitrust investigation in forty years and have a similar impact on these tech giants as the tobacco lawsuits in the 1990s on Big Tobacco.

Yet investors continue to price in incredible growth for these companies. Over the last decade, the average annual profit growth of these companies has been nothing less than stunning, but investors price in similar growth rates for the coming years. 

Realised and expected profit growth

Source: Bloomberg

The problem with growth rates is that we humans tend to be really bad at translating them into hard Dollars. So, let’s do the math. 

In 2019, Apple made net profits of $55.3bn. If Apple’s profits grow for another 10 years at the current expected long-term growth rate of 11% per year, it would have profits of $156.9bn in 2030. Facebook’s profits would grow to $136.8bn in 2030 if current long-term growth expectations would be met (I am not talking about positive surprises here, just meeting expectations).

These numbers may not sound like a lot in the year 2020 when fiscal and monetary stimulus is measured in trillions. But if we put the profits of these companies in relation to the US GDP, it becomes evident that these four companies are a force to reckon with. 

2019 profits of these four companies were typically around 0.05% to 0.25% of GDP. The combined profits of these four companies accounted for 0.56% of the US GDP. In ten years, at currently expected growth rates, the combined annual profits of these four tech giants would account for about 2.5% of US GDP. In Dollar terms, their combined profits would be about the same as Sweden’s GDP in 2019 (or 1.5 times the GDP of Ireland).

If these companies would get into trouble, the profit decline would have the potential to push the US economy into recession. If we let these companies grow to that size, they can blackmail the US government and the Fed to provide them with any kind of support their bosses feel necessary. They will become not only too big to fail but too big to lose money. 

Not even John D. Rockefeller at the height of his powers at Standard Oil had that kind of stranglehold on the US government. In fact, when the influence of Standard Oil became so large that the company controlled 91% of US oil production and made profits of up to $80m per year, Congress acted to break up Standard Oil. In 1911, the company was finally split into different “smaller” oil companies like Exxon, Chevron, etc. But when Standard Oil was broken up, its profits as a share of US GDP at the time were a mere 0.01%!

Today, the four tech giants already make profits ten to twenty size the profits of Standard Oil and control the global advertising and internet search markets. Essentially, they are monopolists on data. That these companies will have to curtail their activities and become subject to antitrust action is, in my view, not a matter of “if”, but “when”. And when their businesses will be curtailed, growth rates like the ones priced into their share price today will simply become impossible to achieve. A crash in their share prices is thus not a question of “if”, but “when”.

Profits as a share of US GDP

Source: Bloomberg