The Dawn of the Profitable Unicorn

The San Francisco-based buyout firm Francisco Partners recently published a delicious analysis relevant for anyone wondering about what the future holds for technology stocks. It is a bulletin in which both pessimists and optimists can find hope and it offers a helpful perspective for those wondering about the current valuations of technology companies.

First, the bad news. The 15 technology companies with the largest market capitalizations in 2000 have been decimated — losing about $1.35 trillion, or roughly 60 per cent, of their combined market value.

Only one, Microsoft, has a market capitalization that is higher than in 2000. One extraordinary aspect of this meltdown is that it did not occur, as some might suspect, in the much ballyhooed dotcom wonder companies of yesteryear. Instead it was a blight that affected most of what were once considered blue-chip technology holdings.

In 2000 Nortel sported a market value of $209 billion that, like those of its classmates, had been bloated by the enthusiasm of the era; it has since gone bankrupt. While other members of this corporate bracket have avoided that ignominy, their long-term stock charts present bleak pictures. Cisco’s market value has faded from $403 billion to $144 billion; Intel’s from $288 billion to $161 billion; and EMC’s from $218 billion to $51 billion.  

For the class of 2000, the sharpest property price declines have been in the deteriorating neighborhoods of systems, hardware and semiconductors. This is due to the continuing decline in the cost of computing, the rise of open-source software, the move to the “cloud” and the emergence of massive data-centers where companies such as Amazon, Google and Facebook are increasingly designing their own approaches.

Now a word from sunnier climes. Fifteen companies that were together worth less than $10 billion in 2000 are now among the world’s 50 top technology companies as measured by market capitalization, with a combined worth of $2.1 trillion. (Had Amazon been included, rather than being classified as a retailer, this number would have swollen by another $250 billion). Apple, which even in 2000 was viewed as little more than a curiosity, has risen in value from $6 billion to $659 billion. A few themes jump out of this listing — the power of novelty, the shift towards China, the benefits of patience and the virtues of capital efficiency. 

Several of today’s most valuable technology companies did not even exist in 2000. Facebook, LinkedIn and Twitter together have a collective corporate history of only 33 years. Even Google and SalesForce were barely smudges on the horizon in 2000. These companies now have a combined value of about $850 billion. Beyond some of the customized systems in their own data centers and, in Google’s case some sideline activities such as its Nexus phones and Chrome notebooks, none of these companies sully their hands with anything as taxing as hardware. They have thrived from the artful deployment of software, in particular the “cloud based” variant, and — for Facebook, LinkedIn, Twitter (and Google’s YouTube service) — organizing and collating the contributions of their users. 

Perched in a clump as the fourth, fifth and sixth most valuable technology companies of the day — are Alibaba, Tencent and Baidu. This threesome is now worth $409 billion — testament not just to how much China has progressed in a decade and a half but a harbinger of the next several decades as the country places increasing emphasis on spawning its own technology.

Woe betide the management of any western technology company that underestimates the challenge posed by the vast number of emerging Chinese competitors — fueled by an ambition and work regimen that’s hard to match in Europe and the US.

Finally, a note about two other themes that jump out of this listing — patience and profits. Most investors in technology companies squander vast sums by reacting to short term jitters or global jolts rather than concentrating on the staying power of those emerging enterprises on the right side of history. 

And for the founders and chief executives of all of today’s billion-dollar “unicorns” there is another abiding message. Almost all of today’s technology juggernauts formed before about 2008 required smallish amounts of capital. Google, for example, only consumed $8 million before turning profitable. Maybe this means that  a new, and very distinctive, class of company will now come into vogue — a rare form of species known as the profitable unicorn.

This article originally appeared on the opinion page of The Financial Times.