People will differ in their opinions on what a great tech company needs. Some people think people are what matter most, especially having a visionary chief executive such as Amazon (AMZN - Get Report) founder and CEO Jeff Bezos.
Another school of thought, propounded by the famed venture capitalist Don Valentine, who kicked off the Silicon Valley gold rush when he founded Sequoia Capital, is that companies should simply have huge addressable markets. Everything else, including finding the right people, can be fixed.
But very few companies in the history of tech find truly gigantic markets that propel them to greatness. The world's top five companies by market cap have a scale that is enormous compared to the thirty next largest companies. Whether or not you agree with Senator Elizabeth Warren that such companies need to be broken up, you have to realize that Amazon, Microsoft (MSFT - Get Report) , Alphabet (GOOGL - Get Report) , Apple (AAPL - Get Report) and Facebook (FB - Get Report) have simply found huge markets and produced something that changed those markets.
Google and Facebook still get almost all of their revenue from advertising, a combined $190 billion or so annually. Amazon gets the vast majority of its sales from retail products, its cloud business notwithstanding. And Microsoft and Apple still dominate the personal computer business -- in Microsoft's case, the enterprise software business, and in Apple's case, the personal computing device (including the iPhone as the most personal of computers) and consumer software business.
From the standpoint of market size, what's relevant for investors in other stocks is how their addressable market measures up to those of the titans. Some of the next largest firms are those that have enjoyed huge markets in the past, only to see the growth of those markets cool in recent years. Intel (INTC - Get Report) made most of its livelihood off of the personal computer but unlike Microsoft and Apple, didn't find giant ancillary markets beyond that (as Microsoft did with cloud computing and Apple did with the iPhone.) It has a heck of a big market in the data center as well, though at $21 billion in sales annually, it still can't compare to the $70 billion or so that comes from "client computing." That's why Intel's revenue growth has cooled to low single digits.
The same is true of Hewlett-Packard. Now 80 years old, the company had a glorious history in huge expanding markets but has now, in its two incarnations, HP Inc. (HPQ - Get Report) and Hewlett-Packard Enterprise (HPE - Get Report) , cooled as far as growth.
What most distinguishes the giants from other tech companies is how they've created a platform, a system that entails ongoing business, rather than simply selling a single widget. That's the nature of the marketplaces created in advertising by Google and Facebook, and the Microsoft software subscription business.
Where else can one look to find dominant businesses? Looking at companies significantly smaller, but promising, Applied Materials (AMAT - Get Report) , the world's biggest maker of chip equipment, has amassed an empire in tools to make parts, both in silicon and in display glass for phones to TVs. This is a business with not just widgets to sell, but with a high services component that promotes an ongoing relationship with customers.
Certainly Salesforce (CRM - Get Report) has created a platform business, one that is increasingly a touch point for many startups that want to revolutionize the so-called "front office" of enterprise operations. Whether Salesforce's business will continue to scale from roughly $13 billion in revenue annually will depend less on organic growth than on acquisitions of promising young cloud companies. Given how many cloud companies are being formed all the time, Salesforce is likely just at the beginning of that M&A quest.
In the field of networking, Arista Networks (ANET - Get Report) is a company with an attractive market that has moved outward from its presence in cloud computing to enterprise data centers. With only $2 billion or so in revenue, Arista is far from being a giant at this point, but its software has the potential for retaining customers over many years, which could set the company up to be more than simply a vendor of networking boxes.
Much further down in terms of revenue are fast-growing cloud darlings such as Twilio (TWLO - Get Report) , Zoom Video Communications (ZM) and Veeva Systems (VEEV - Get Report) . Of those three, Veeva has shown the greatest ability so far to build a software platform that can spread across functions and industries. The company may have its first $1 billion revenue year this year, which means there's a long way to go to even prove that it has the staying power of Salesforce. A crucial test is how well the company's software spreads beyond its current bailiwick in the life sciences industry to become a more general platform or enterprise operations.
The concentration of wealth at the top of the food chain is indicative of just how hard it is to find gargantuan markets. Many companies are great businesses, and their stocks are worth buying at decent valuations. But not all of them become the stuff of business legends.
There just aren't that many fields that offer the kind of vast opportunity that Don Valentine spied in the PC device market of Apple or the advertising market of Google, when they were young and he put money into them.
The mystery of tech's concentration in a handful of firms is one for investors to ponder and ponder.
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