Why Trillion Dollar Companies Are Shrinking in Valuation - A Closer Look Into the Club

Why Trillion Dollar Companies Are Shrinking in Valuation - A Closer Look Into the Club

It was in May 2022 that news began circulating about the world’s largest technology companies that lost over USD 1 trillion in value over just three trading sessions.  This was in direct response to the Federal Reserve raising its benchmark interest rates.

The year-over-year inflation rate has remained abnormally and consistently high and peaked in June 2022 at 9.1%, according to the Consumer Price Index Data.  It fell to 8.2% in September 2022, which was well above the inflation rate of 2% that is preferred by the central bank.

The Federal Reserve Bank has been struggling to control and bring down the inflation rate, and working towards this had announced a 0.75% interest rate hike.  This is the sixth interest hike by the Federal Reserve in the hope that it can cause prices to reduce by slowing down the economy.

Top Companies Valuation (2020-22)
Top Companies Valuation (2020-22)

As stocks at large began selling off with the Federal Reserve’s announcement of yet another interest rest hike, the technology sector felt the tremors more than any other sector.  The world’s most valuable company, Apple, shed USD 220 billion followed by Microsoft which lost USD 189 billion, Amazon declined by USD 173 billion, Alphabet lost USD 123 billion, and Meta which lost USD 70 billion.  Investors are also showing an increasing interest in pushing their money toward the safer market pockets as opposed to stocks that drove business during the strong bull market in recent years.

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Reasons for Value Shrinkage

Warning Signs

Reasons for Value Shrinkage

As much as the numerous interest rate hike by the Federal Reserve Bank have impacted trillion-dollar companies to lose valuation, the entire burden for this decline does not rest on its shoulders alone.  There are reasons, external and internal, that hugely impact the fluctuation in a company’s valuation.

External Factors

Many external factors affect the valuation of any company these includes-

  • Government Policies
  • Macro-Economic Forces
  • Industry Life Cycles
  • Company’s Own Life Cycle
  • Personal Needs and Desires of the Owner
  • Capital Markets

Each of these factors is of considerable importance which makes it tough for a company to accurately time any transaction.  However, historically, credit markets have proven to be one of the most powerful external forces that decide the valuation of a company.  There are two primary reasons for this.

1. Rate of Return

Economic risks are measured by determining the rate of return required for an equivalent investment facing an equivalent level of risk, known as the ‘discount rate’.  Simply explained, it means that as the interest rates go down, current values go up which ensures that the company’s valuation increases.  Contrarily, the higher the interest rates, the lower the valuation as borrowing money becomes more and more expensive.  This decreases a company’s valuation.

2. Supply of Money

This particular concept heavily influences business valuations.  As the economy slows, the Federal Reserve lowers the interest rate driving the capital markets to loosen purse strings by buying stock cheaply.  What then happens is that there is more money that competes for a limited number of assets which, then, consequently, drives valuation higher making investors take on more risks due to easy access to debt and lower discount rates.  This period of speculation ignores the fundamentals where the growth is high.

Internal Factors

An Enterprise’s value also depends on these critical micro-business valuation factors which are largely internal and within the control of the management team.

  • EBIDTA Size
  • Revenue Trends
  • Profit Margins
  • Customer Concentration
  • Industry Concentration
  • Strength and Depth of the Management Team
  • Competitive Advantages

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Warning Signs

Companies that lose valuation do not do so overnight.  There are warning signs that come to the fore before the actual valuation drops.  These warning signs, if not recognized and corrected at the right time can prove to have devastating effects on businesses.

  • A sharp drop in revenues
  • Delayed payments to creditors
  • Default on statutory payments
  • Delay in payment of employee salaries
  • Numerous red flags were raised by auditors, analysts, and fund managers in the annual accounts
  • Huge churn in the company’s top management
  • Company stocks being sold off quickly by institutions
  • Promoters exiting their stake
  • Deteriorating performance in comparison with competition
  • Consistently dropping return ratio on ROE, ROCE, ROA, NPM, OPM, etc.

Here are the famous top 3 companies that lost 1 Trillion in Market Cap

Company Industry Date Market Cap Hit $1T Market Cap (DEC 23, 2022)
Meta Technology Jun 28, 2021 310.55 billion USD
Tesla Automotive Oct 25, 2021 392.78 billion USD
Amazon Retail Sep 4, 2018 854.80 billion USD

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Economic downturns are a harsh reality in the global world.  However, if companies are consistently losing valuation despite external factors like stable federal reserve interest rates and a bullish capital market, the reasons are more than likely internal.  It is, then, to an investor’s advantage to conduct a deep study of the business itself and its internal functions to realistically assess the risks of investing.


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