Amazon Is About to Pass Buffett's Company: Who Were the Most Valuable Companies of the Past 50 Years, and What Change Do They Represent?

Market capitalization shows what investors think about the size and prospects of the market a company is in.

Warren Buffett, the "God of Stocks," runs Berkshire Hathaway, the benchmark of the investment world. In 2006, Google's market cap passing Berkshire Hathaway's was treated as the milestone that proved the search giant could make serious money; in 2015, when people argued for Bitcoin as an investment, they often pointed to the fact that its returns had beaten Berkshire Hathaway's.

The latest company investors are measuring against Berkshire Hathaway is Amazon.

Last Monday, Amazon briefly passed it with a market cap of $356.5 billion, becoming the world's fifth-largest company. A few hours later it slipped back. The two will probably keep trading places for a while.

Eighteen months ago, though, Amazon was worth less than half of Berkshire Hathaway. It climbed that fast because it published a set of numbers.

In April 2015, Amazon reported the results of its cloud computing business for the first time: the unit, called AWS, had brought in $4.7 billion in sales and $660 million in profit over the previous year. For the nine years before that, Amazon had kept the business buried in complicated statements, and nobody knew whether it made money.

Market capitalization shows what investors think about the size and prospects of the market a company is in.

Amazon itself changed little before or after that report. But the report made the capital markets see that, on top of controlling e-commerce in Europe and the US, it could also make serious money from cloud computing. Amazon's market cap has risen 108% over the past 18 months, adding more than $100 billion.

Wall Street analysts put their average price target for Amazon over the coming year at $809.28; analysts at JPMorgan go as high as $915. Carlos Kirjner, an analyst at Sanford Bernstein Co., is more bullish still: he thinks the stock can reach $1,000.

Amazon's shares trade at $744 today. If these analysts aren't badly wrong, Amazon's market cap will pass Berkshire Hathaway's before long and settle into fifth place worldwide.

At that point, four of the world's five most valuable companies will be tech companies. And all of them sell directly to individual consumers.

That is very different from before. Trace the past 56 years of market caps and you find it was not always this way.

It Wasn't Always Like This

Before the 1990s, things were calm. The ten most valuable companies came from basically three groups: industry, energy, and old-line technology (IBM, AT&T).

The leaders in industry were General Electric (GE) and General Motors (GM). GE's history goes back to Edison; its main businesses include electronics, energy, and aerospace. It is the only stock that has stayed in the Dow Jones Industrial Average since the index was created.

General Motors was for a long time one of the largest industrial manufacturers in the US, and it drove the growth of Detroit, the Motor City. Failed investments and management problems left it behind.

GM ran short of cash during the 2008 financial crisis. Even after taking a bridge loan from the US government, it could not pull itself out of the mire. In June 2009 it filed for bankruptcy reorganization.

During the Cold War, and especially in the 1960s and 1970s, the shadow of war sent crude oil prices swinging fast. Oil companies were worth a great deal in those years. The wave of energy mergers in the 1980s left fewer companies on the list, but larger ones.

Across the 1980s, oil company mergers involved more than $3.7 trillion. In 2015 the ten largest oil companies in the world were worth about $1.6 trillion between them — strip out inflation and that is only about $880 billion in 1980s dollars.

After the Cold War, Business Boomed

Until the mid-1980s, a third world war was still a future the US and the Soviet Union took seriously. They staged one military exercise of unprecedented scale after another, shot down a civilian airliner, and launched the Star Wars program.

Then the Soviet Union collapsed in 1991, and the possibility of a third world war suddenly disappeared.

Military research bodies, government research bodies, and other companies and organizations that had been doing advanced or basic research could put their energy back into applied work. At the same time, calmer conditions in one region after another around the world lifted what ordinary people could spend.

Here you can see the market caps of biomedical, retail, and consumer goods companies climbing.

Besides the change in industries, today's big companies are no longer a handful of oligopolies.

In 1960 the most valuable company was AT&T, worth about $26.2 billion — $210.7 billion in today's money once you account for inflation — which was 6.9% of the entire US public market. Apple, the most valuable company today, is worth nearly $550 billion, but that is only 1.95% of all US exchanges. The market itself has grown far bigger.

Government, the Dot-Com Bubble, and Subprime Loans Reshaped the Decade After the Cold War

A law passed under the Reagan administration in the 1980s to turn basic research into new products gave a large push to biomedical technology.

After a decade of work, the first biomedical technology companies appeared on the list in the 1990s.

The Reagan administration introduced a law meant to turn basic research into new products, the Bayh-Dole Act, which let medical results developed with public funding be patented.

Before that, such products were not protected by patents once developed; they belonged to the public. Later came the Hatch-Waxman Act, which simplified approvals for generic drugs and extended patent terms for new ones.

After biomedical companies, market caps surged in technology. In 2000, six tech companies made the top ten, and several of them made their real money selling networking gear to the internet companies then being founded and taken public at breakneck speed.

The Nasdaq index, thick with internet companies, broke 5,000 points for the first time on March 10, 2000 — the first time in the 29 years since Nasdaq was founded.

Services that are common today, such as getting a meal or a package delivered within an hour, all appeared around 2000 as well. But back then internet users sat in front of PCs at the office and at home.

The tech companies that went public in 2000 had average sales of just $17 million, and among the tech companies queued up to list at the same time, 70% were not profitable. Most of them went under one after another.

Between March 2000 and October 2002, the stock market lost nearly $5 trillion in value. This is what people call the bursting of the 2000 internet bubble.

The US Securities and Exchange Commission decided the investment banks had misled investors and fined Citigroup, Merrill Lynch and other firms millions of dollars.

After the internet bubble burst, another one slowly swelled.

The share of American families that owned their home hit a record 69.2% in 2004. Low interest rates and a flood of money from outside the US made credit loose, fed the housing boom, and encouraged people to spend on borrowed money. Between 1997 and 2006, the price of an ordinary American home rose 124%.

The hot property market pulled AIG, Citibank, Bank of America and other financial institutions into the mortgage finance game.

In 2006 the US issued $489 billion of CDOs in all, $34 billion of them underwritten by Citigroup, which made it the second-largest CDO underwriter after Merrill Lynch.

AIG took part in almost every stage of the US mortgage market, above all through its AIGFP unit, which sold credit default swaps (CDS) and invested in subprime loans. Under the terms of a CDS, once an investor bought one from AIGFP, AIG promised to pay the buyer if the securities it covered defaulted.

Banks large and small did this partly for the money, but more because they did not believe property would crash.

As with the 2000 tech bubble, the overheated market cooled fast, and the subprime crisis broke.

In 2008, Citigroup's market cap shrank to $100 billion. On March 6, 2009, Citibank traded as low as $0.97 a share, the first time its price had fallen below $1 since the company listed in 1986.

By July 2009, AIG's market cap had fallen from its 2006 peak of $190 billion to less than $2 billion.

Today Most of the World's Most Valuable Companies Come From Tech, and They Sell Straight to Consumers

Once smartphones spread, app stores arrived with the iPhone, and fast mobile networks matured, the internet finally reached most people.

Users now spend 30 minutes a day on social networks on their phones. Even refugees and homeless people treat a smartphone as a necessity.

If you are happy to stay in and not go out for 18 days straight, a phone alone can cover everything you need to buy in daily life.

Look at the ten most valuable tech companies in the world today: every one of them is either tied to smartphones or in the internet business.

Each controls a specific field, and each draws its revenue from very few places.

• Apple, on the strength of the iPhone, took 94% of the profit margin in the global smartphone industry.
• Alphabet (Google) keeps releasing one free internet service after another. Users run more than 100 billion Google searches a month, and every search, every click, feeds the advertising machine.
• Most of Microsoft's revenue comes from its enterprise business; on profit, the non-enterprise side loses money. This is the next IBM-style company.
• Amazon controls nearly half the online retail market in the US, and that share rises every year. In the young cloud computing market, Amazon has 31% and second-place Microsoft only 9%.
• Facebook works much like Google: free internet services paid for by advertising. It now has more than 1.6 billion monthly active users, 66% of whom use it every day. Facebook's stock rose 22% over the past year, and its market cap is now very close to Johnson & Johnson's. It is probably the next company people will measure against Berkshire Hathaway.

The Age of the Most Valuable Companies Shows How Much the World Has Changed

The chart makes it plain: between 1960 and 1995 the average age of the most valuable companies simply grew year by year — the names at the top barely changed.

That began to change in 2000. The biggest companies now are younger. Alphabet, Amazon and Facebook were all born in the internet era, and even Apple and Microsoft have only just turned 40.

These Companies Make Good Money Off Every Person

It is not only American tech companies. Chinese ones also draw their revenue from very few places. Tech companies in both countries make good money off every user.

The user numbers for the companies in the chart were worked out from the following:

• iPhone has 600 million users, according to calculations by the independent analyst Neil Cybart;
• Microsoft is counted by retained PC users;
• Alphabet's users are the entire internet population outside China;
• Amazon is counted by global active accounts;
• Tencent and Baidu are counted by China's internet population;
• Alibaba is counted by its active accounts;
• Facebook has 1.6 billion monthly active users. It owns WhatsApp, but has not started making money from it.

Who Will Be the Next Giant?

The mobile internet is said to have been booming for years, but in fact very few of today's listed tech companies rose only after smartphones took off.

Since the smartphone boom began in 2007, the largest listings have been Facebook and Alibaba, worth $104 billion and $231 billion respectively on their first day of trading.

But Facebook was the company Mark Zuckerberg started in his dorm room in 2004. It was already a hit by 2006, and as late as its 2012 listing it was still being criticized for how poorly it worked on phones.

Alibaba was founded in 1998, and both Taobao and Alipay date to 2003. It did not start talking about a "wireless (smartphone) strategy" until 2013.

China is in slightly worse shape. There is only Baidu, Alibaba and Tencent, plus the proxies they have taken large stakes in.

In the end, the spread of the mobile internet only made already-large internet companies larger.

The startups that raised huge sums and reached valuations of tens or even hundreds of billions of dollars have run into trouble lately too, cutting their valuations and laying people off.

By the numbers, the startup closest to the giants is clearly Uber: a $68 billion valuation, several industries completely changed (e-hailing, taxis, car rental), and dominance in market after market around the world.

Even so, Uber, the best performer on the numbers, does not inspire the optimism Facebook did when it listed four years ago.

Uber has raised $14.11 billion since it was founded. Facebook, by comparison, was valued at more than $80 billion before it listed, but had raised only a sixth as much — about $2.4 billion over 11 rounds. Uber is under far more pressure to bring in revenue.

According to data leaked earlier, Uber's total revenue passed $3 billion in the first six months of 2015. But after discounts, driver subsidies, refunds and the rest, what Uber kept was $663 million — and over those six months it lost $1 billion.

The better question may be whether, in the next few years, we will see another success on the scale of Facebook.

Cover image: YouTube, ruleoneinvesting, Visual China Group