S&P 500Startups, Or The Takeover

Most people think that the S&P 500 is a list of the biggest companies in the world. But, this isn't true for two reasons — firstly, because most people don’t ever think about the S&P 500 :). For the small minority that do think about it, this statement is still not entirely accurate.

The companies or, more accurately the components, that make up the S&P 500 are actually hand selected by a committee after considering eight variables: market cap, liquidity, domicile, public float, financial viability, sector, years as a public company and listing exchange (i.e. NYSE, NASDAQ…).

Like most things in finance, this multi variable human powered selection process is more complex than it needs to be. So lets put aside the details and agree that broadly speaking, the S&P 500 represents the largest and most influential public companies in the American economy.

Which brings me to the central point of this blog post: we can use the top ten companies in the S&P 500 as a barometer for the economy and the relative importance of one sector versus another. We are undergoing a dramatic shift whereby every one of the top ten S&P 500 components will be a tech company.

The Age of Oil

In 1980 there were only two technology companies listed amongst the top ten names in the S&P 500: IBM and AT&T. As a quick aside, most people don’t think of AT&T as “tech” company but in 1980, it was among the most innovative and powerful companies in the world (if you don’t agree, read up on Bell Labs — they only invented C, C++ and TDMA/CDMA!).

Source: Data and Logo credit goes to ETFDB.com; Design work by yours truly

The rest of the top ten was composed largely of firms that dig for oil, extract oil from the ground, process oil and/or sell gasoline. Exxon, Standard Oil (both of Indiana and California), Shell, the list goes on. The image to the left makes the overall point clear: 2 tech, 7 oil and 1 industrial (General Electric). This was 1980, the year oil hit a record high of $35 per barrel ($101 in today’s money). America’s economy reflected that reality and this is easily seen through the top ten companies in the S&P 500.

Thirty Five Years Later

Fast forward to 2015, the top ten now has four tech companies, twice as many as 1980, but still a minority:

  1. Apple — The leading mobile platform (both hardware & software ecosystem)
  2. Microsoft — Still the leading productivity player despite a substantially reduced position in the OS market
  3. Amazon — The leading e-commerce player with a fast growing and potentially dominant position in the cloud computing space
  4. Facebook — The leading social networking and advertising platform
Source: Data as per S&P Dow Jones Indices (Oct 2015); Design work done by yours truly

Of the six remaining companies, only two were in the Top 10 in 1980: ExxonMobil and General Electric (note that Exxon acquired Mobil along the way, hence, ExxonMobil). And, of the four that were not in the 1980s list, two are banks (JP Morgan Chase and Wells Fargo), one is a CPG (Johnson & Johnson) and finally, one is a conglomerate known as Berkshire Hathaway, comprised largely of a single asset, a gentleman named Warren Buffett. Berkshire also happens to own some of the marquee assets in Insurance, Rail Road and Re-Insurance .

The Coming Takeover

My expectation is that within 5 years, the top ten list will be comprised entirely of tech companies. Only a Minority Report precog could, with 100% confidence, tell you which new companies will join the top ten. Notwithstanding this, I’m going to go ahead and take a crack at it and I’ll be happy if I hit 50–70% accuracy:

  1. Uber — With a valuation in excess of $60B, ~$2.0B in net revenue and the opportunity to move tens of millions of people around cities at the lowest possible cost, Uber is without a doubt the most exciting company of its generation. Add on to that, the opportunity to deliver food, products and other items “on-demand” and you have a company that is re-wiring not only logistics but rather commerce in the broadest sense. Also, self driving cars ;)
  2. Alphabet (aka Google) — Sergey & Larry are parlaying a dominant position in search into the potential to build the next great conglomerate, a Berkshire of “moonshots” called Alphabet. With search holding strong, Android on a few billion phones and the growing possibility that just one of their next gen bets (such as autonomous cars, fiber internet, immortality…) pays off, Alphabet is the most diversified, most resilient and is likely to be the longest lasting of all the companies that I see residing in the top ten.
  3. Tesla — Three mega trends that are going to fundamentally alter the next 50 years are autonomous vehicles, grid scale energy storage (enabling renewable power to replace fossil fuel based generation) and software invading every facet of our lives (the so-called Internet of Things). Tesla sits in the middle of all three. Their first two cars are getting iPhone love from consumers, the early lead in electric vehicles is fueling a long term competitive moat as the global low cost producer of batteries (which enables ever cheaper cars & grid scale storage) and, they are first to market with autonomous driving features. Tesla cars are driving themselves, right now! The best car companies are way behind (see Exhibit A: Porsche) and every tech company is racing to catch up.
  4. Airbnb — The largest hotel in the world and they don’t own any real estate! Airbnb earned over $900M of net revenue in 2015 and is on a path to $20B by 2020. This “marketplace” for lodging has over 2.0M properties across 190 countries which enabled over 24 million people to book rooms in Q3 2015. Airbnb’s valuation is larger than any of the big “hotel” companies such as Hilton or Marriott. If you don’t think that Airbnb is going to be the largest provider of lodging globally, consider the fact that hotels are beginning to use Airbnb as a marketing channel (much like they do with Expedia or Priceline). This means that hotels are paying Airbnb. This was un-thinkable just a few years ago.
  5. “FinTech Conglomerate” — JP Morgan, Wells Fargo and all of the other Too Big To Fail banks woke up in 2015. Jamie Dimon, the prototypical Wall Street CEO, rang the warning bell against the coming FinTech wave in JP Morgan’s Annual Shareholder Letter:
“Silicon Valley is Coming … There are hundreds of startups with a lot of brains and money working on various alternatives to traditional banking …
…Competitors are coming in the payments area. You all have read about Bitcoin, merchants building their own networks, PayPal and PayPal look-alikes”
Source: JP Morgan Shareholders Letter 2014 (Image of CEO Jamie Dimon)

In the short term, the breakout FinTech winners are largely marketplace lenders such as the publicly traded LendingClub. In the long run, Blockchain & Bitcoin powered players such as Coinbase, the PayPal of Bitcoin, are likely to give traditional banks a “run for their money”. If you think that the large banks have nothing to fear from the Blockchain, ask yourself why Goldman, JP Morgan and others are channelling their inner Michael Corleone (“Keep your friends close but your enemies closer…”) through an unprecedented partnership with the Blockchain startup R3.

6. Snapchat — What started in 2011 with disappearing d!&k pics is now the go to mobile app for Millennials. And its already producing $100M of revenue! Snapchat has positioned itself as the emerging winner in mobile video. Don’t agree? 100 million users are watching 6.0 billion videos, everyday. With these kinds of numbers, tier one publishers like Vice, CNN and MTV are begging to be included on Snapchat’s “Discover” platform. Snapchat is in a position to be to the Millennial what Cable TV was to Gen X: massive distribution + top tier proprietary content + 10x improved ad targeting.

The chart below provides a visual overview of the what my projected S&P 500 top ten looks like. All tech, with legacy players like Exxon and Wells Fargo no longer in the mix.

This post has now officially run 500 words longer than expected! I’ll conclude by noting that posts filled with predictions are a bit dangerous. The odds of being right are low, the rewards for being right even lower and like all things on the Internet, they live forever.

It’s the first work day of 2016 and my plan is to make this the first of many posts this year. I hope you enjoyed and I encourage you to send feedback to @russsamuels or russell(at)whitecapvp(.)com.


Russell’s Note: If you enjoyed this post, I encourage you to check out my last two posts (I promise they are much quicker reads!):

1. Read Like A [VC] Or, How Five URLs Can Turn You Into Marc Andreessen ;)

2. Read Like A [Marketer at the World’s Fastest Growing Startup] Or, How My Daily Distractions Power My Marketing Ideas

Or, learn more about our venture fund at WhitecapVP.com