King of the Hill

The FAANG/FAAMG (Facebook, Apple, Amazon, Netflix/Microsoft, and Google) stocks have been the darlings of the stock market for the past decade. In addition to delivering incredible returns to shareholders, FAANG’s success derives from their ability to capitalize on some of the biggest trends of the past decade, including the rise of the internet, the growth of e-commerce, and the increasing popularity of mobile devices. These powerhouses, however, are facing increasing competition from new firms that are developing innovative technologies and products: PayPal and SpaceX are challenging the FAANG stocks in the technology sector, while companies like Airbnb and Uber are disrupting the traditional transportation and hospitality industries. The rapid growth and accumulating profits of these new companies may result in the FAANG stocks experiencing a stock related growth slowdown in the coming years. The expensive price of the stocks in addition to the mere size of the FAANG companies may deter investors; they may lose a considerable amount on their return in comparison to their profit from newer and smaller companies. Consequently, as investors turn their attention to smaller and cheaper companies, the stock prices of the competition will likely rise, leaving the previous powerhouses in the dust.

If not the FAANG stocks, which small companies will shareholders look to invest in and why? The answer lies in who is not only recognizing, but taking advantage of modern trends: big data and artificial intelligence (AI). Data is currently used to power a wide range of new technologies that are aimed to vastly improve customer experiences, build out generative AI platforms, automate machine learning, and construct super-fast 5G networks (Marr 2021). The power of AI closely correlates with that of big data; AI is used to automate tasks, improve efficiency, and design new products and services. What truly excites investors, however, is how AI and Data will promote the success of these companies in the future; They fundamentally support a company’s success. Data provides the information on the preferences of the company’s customers while AI is the system that allows the companies to ultimately process that information to build an algorithm to cater to the consumer’s desires. Together, the inclusion of AI and Data into the workforce increases production while also reducing costs associated with labor by limiting inefficiencies in production. Ultimately, these companies are generating higher profits while maintaining an optimal customer experience–an attractive incentive for investors.

Not all FAANG stocks, however, are in danger of being thrown to the wayside. Microsoft and Apple have already latched on to the potential of AI and Data and are using it to capitalize on every opportunity; their pre-established success allows both Microsoft and Apple the ability, funding, and workforce to constantly innovate and develop new products and services.

While Microsoft already offers users access to AI through the Azure Cloud Platform, their recent plans to implement AI into Excel and Word, two applications used daily by any person, hints at their oncoming future success. The data Microsoft captures from their Azure Analytics systems will empower organizations to make real time data-driven decisions. The efficiency the program provides not only allows Microsoft to optimize their existing business, but also gives them the ability to create entirely new products, services, and experiences for users. Additionally, the system can be used to run simulations for future scenarios and provide historical analysis, which is then overlaid on top of operational functionalities in the current business (Sanders 2023). For investors, the focal point of these additions are companies that will pay Microsoft to access and use the functionality of the data collected .

Apple is already the world's largest smartphone, tablet, and smartwatch manufacturer. Apple is planning to implement new AI elements into their upcoming designs by utilizing data from the users of the IOS systems. The success of the Apple product experiences comes from seamless integration of the platform and device capabilities towards tasks people value most. With the user’s consent, Apple uses data to integrate information available about platform capabilities to enhance the experience without asking people to enter data. For example, you might accept payments, provide security through biometric authentication, or offer features that use the device’s location (Apple 2022).

Apple and Microsoft both seem poised to stay kings of the market for the foreseeable future. Boasting stockpiles of cash at $52 billion and $99 billion respectively, these two companies have plenty of money to invest and deliver on the technologies and visions they have laid out for the future. At a minimum, it is expected that investors should continue to turn to these two mega-caps as safe-havens of the market.

Meta Platforms Inc., formerly known as Facebook, is a powerful contender to re-join Microsoft and Apple in the top five largest stocks in the world. The company's stock has been on the rise so far this year; it has already doubled the lows of $89 a share to around $220 a share today, in addition to regaining their position as one of the most valuable companies in the world ranking 8th by market on U.S stock exchanges valued at $564 billion (Yahoo Finance 2023). Meta's success can be attributed to their strong track record of innovation and adaptability, monetization, consumer rate, and strategic cost cutting efforts.

Meta's business is divided into two main segments: Family of Apps and Reality Labs with apps being further broken down into subsets: Facebook, Instagram, WhatsApp, and Messenger. Meta, as a whole, generated $117 billion in revenue in 2022. The Apps segment produced $31 billion in revenue in Q4 ‘22, with Quest coming in at $727 million (Facebook–Financials 2023). To supplement their high revenue, Meta's business is also highly profitable. The company's operating margin was as high as 31% in 2022, meaning for every dollar of revenue that it generates, it keeps $0.31 in profit. The apps’ expanding popularity is demonstrated through Meta’s rapid growth, with impressions and delivery across the family of apps increasing 18% YoY (year-over-year) (Facebook–Financials 2023). Mark Zuckerberg, Meta founder and CEO, praises the company's growth, saying, "Our community continues to grow and I'm pleased with the strong engagement across our apps. Facebook just reached the milestone of 2 billion daily activities" (Facebook–Financials 2023).

Moving forward, Meta plans to continue to grow their user base and put an emphasis on monetizing their user platform by continuing to innovate their AI discovery engine and Reels (Facebook–Financials 2023). The company is also expanding to invest in virtual reality (VR) and augmented reality to further enhance the user experience. Meta is already distributing their first model of Oculus, a VR headset made to immerse the user in the virtual world.

Meta is also enacting cost cuts to help improve their profitability in the near term. Meta management claimed the “theme for 2023 is the 'Year of Efficiency' and we're focused on becoming a stronger and more nimble organization" in their Q4 (fourth quarter) earnings press release (Facebook–Financials 2023). Subsequently, the company announced the lay-off of 3,000 employees to reduce the company’s workforce by 5%. It also reduced their spending on research and development. The company cut their R&D budget by $1 billion in 2022 as well as also reducing their spending on marketing and advertising by $2 billion (Facebook–Financials 2023).

Meta's success as a company is going to come down to their spending management and execution of their ‘Year of Efficiency' claim. In the CFO’s outlook commentary, “We may incur additional restructuring charges as we progress further in our efficiency efforts. We expect capital expenditures to be in the range of $30-33 billion, lowered from our prior estimate of $34-37 billion. The reduced outlook reflects our updated plans for lower data center construction spend in 2023 as we shift to a new data center architecture that is more cost efficient and can support both AI and non-AI workloads” (Facebook–Financials 2023). Essentially and positively so, every dollar Meta does choose to spend going forward will overwhelmingly support the Family of Apps. The success of those apps making a bottom line profit should drive the companies market cap higher in this year and years to come.

Overall, the four reasons that drive outperformance in stocks over the long run are a company's strong financial positions, unique ideas, a founder’s leadership, and success. People want to make money and so they need to be invested in companies’ whose stock prices continue to move higher, regardless of the fundamental picture.

With that said I am confident there will be two newcomers joining Apple, Microsoft, and Meta at the top.

Tesla not only has the potential to become one of the next FAANG stocks, but may even eclipse the market capitalizations of Apple and Saudi Aramco combined (Eckert 2023). Tesla's cars performance and efficiency are becoming increasingly popular with consumers. The company has a strong track record of innovation and growth, and is well-positioned to benefit from the transition to electric vehicles (EV). Electric car sales in the United States increased from 0.2 % of total car sales in 2011 to 4.6 % in 2021 (Ice 2023). Several factors that have contributed to the EV market boom include increased consumer interest, government policies, and buy-in from the auto industry. S&P Global Mobility forecasts “electric vehicle sales in the United States could reach 40 % of total passenger car sales by 2030, and more optimistic projections foresee electric vehicle sales surpassing 50 % by 2030” (Ice 2023). Therefore, the global electric vehicle market is expected to grow from $182 billion in 2020 to $828 billion by 2028, at a compound annual growth rate (CAGR) of 28.8%. With Tesla accounting for 64% of the US EV market in 2022, they should have no shortage of demand moving forward.

Financially, Tesla is highly likely to continue improving in the foreseeable future. With already industry leading profitability, Moody’s Investor Research recent upgrade of Tesla to a blue-chip stock is a huge milestone; the upgrade of their credit rating to Baa3 represents the first rung on their investment grade ladder for corporate debt. This moves Tesla from Junk Grade to Stable, classifying the stock as blue chip. Along with Moody’s upgrade of Tesla to investment grade, S&P Global Ratings upgraded Tesla to “BBB” back in October 2022. Considered an investment grade rating, S&P analysts wrote at the time, “We believe Tesla continues to demonstrate market leadership in electric vehicles (EVs), with solid manufacturing efficiency that supports strong EBITDA (earnings Before Interest, Taxes, Depreciation, and Amortization) margins and sustained positive free operating cash flow (FOCF), albeit with high capital expenditures” (Schulz 2023). The company has a cash position of over $20 billion and has generated positive free cash flow for eight consecutive quarters as well as eleven of the past twelve (Tesla 2023). Tesla's revenue and earnings have been growing at a rapid pace, and both are expected to continue to grow in the coming years.

Aside from their profiting revenue and earnings, Tesla’s investments in research and development, more specifically self-driving cars and battery technology, amplifies their financial gain. Tesla reported that Q4-2022 was another record-breaking quarter and 2022 was another record-breaking year. In Q4, they achieved the highest-ever quarterly revenue, operating income, and net income in their history. Ultimately, their revenue growth totaled to 51% year over year to $81.5 billion and net income (GAAP) which more than doubled YoY to $12.6 billion. In terms of profitability, Tesla recorded a 16.8% operating margin and $13.7 billion GAAP operating income converting to $14.1 billion for non-GAAP net income in 2022. Tesla has a strong cash position with operating cash flow reaching $14.7 billion and free cash flow of $7.6 billion in 2022. All of their efforts resulted in a $1.1 billion increase in cash and investments equivalents at the end of in Q4 tallying $22.2 billion (Tesla 2023).

Tesla’s strong brand and a wide range of products in addition to their recent price cuts attracts a larger consumer base. Furthermore, Tesla’s strong financial position allows them to continue to cut prices which weed out other competitors: The price cuts send a clear message that the company is prioritizing sales over profits, which could potentially spur a price war in the EV market (Wayland 2023). Fortunately for Tesla, while dropping prices does have an effect on Tesla’s margins, other competitors have even less room to work with. As confirmed by Bank of America Securities Analyst John Murphy, “Most OEMs (Original Equipment Manufacturers) are currently losing money on EVs, and these price cuts are likely to make business even more difficult, just as they are attempting to ramp production of EV offerings” (Wayland 2023). Tesla’s decision to make the vehicles more affordable also gives them the benefit of increased eligibility for federal tax credits on more of their models (Wayland 2023). Their ability to upsell optional features, such as advanced-driver assistance systems and in-vehicle Wi-Fi, allows Tesla to balance out the loss profits from price cuts. As traditional automotive makers' free-cash-flow yield on electric vehicle divisions are only around 3-4%, Tesla’s most recent gross margins were 19.3% (Wayland 2023). As a fully vertically integrated company, Tesla controls all aspects of their business from design to manufacturing to sales; with a high degree of control over their products, they are able to move from R&D (research and development) to manufacturing quicker than their competitors.

Perhaps the most important element within their integration is Tesla’s attention to the development of technology. Tesla has developed their autopilot and full self-driving (FSD) technology–an essential milestone towards their prolonged success: “Every customer in the US and Canada can now access FSD Beta functionality upon purchase/subscription and start experiencing the evolution of AI powered autonomy”(Tesla 2023). Tesla's technology will give the company a competitive advantage over other electric vehicle manufacturers. They are taking strides to controlling cost efficiency in the manufacturing of EVs and battery manufacturing (two unsolved problems amongst their competitors). Their ability to maintain this progress over their competitors will ultimately determine long-term success of OEMs versus Tesla.

Although the Tesla advancements and EV market is exciting to any investor, their ultimate success will always fall back to the consumer experience. Tesla has the most miles driven of any EV maker; as of Q4, 2022 had recorded over 90 million miles driven with the FSD beta version. Keeping people safe, and the ability to experiment, tweak, and ultimately perfect the drive of Tesla vehicles is essential to the continued increase of sales. Compared to the US average of all vehicles driving 500,000 miles per accident, Tesla’s 1.8 million miles driven per accident with an owner at the wheel statistically proves the increased safety a Tesla provides (Tesla 2023). If the driver is safer in a Tesla vehicle than other vehicles, more people will buy the ever-improving cost efficient Tesla. As Tesla revenue increases and risk factors in terms of the user experience decreases, Tesla becomes an even more attractive investment.

While their leading position in the EV market, successful finances, and emphasis on research and development gives Tesla an opportunity to join the top stocks, there is a substantial list of risks that investors should be aware of when investing in Tesla. Tesla has a high valuation at north of a 40 price to earnings ratio, demonstrates reliance on government subsidies, and is facing increasing competition from other automakers, both traditional and electric. Regardless, Tesla’s success in the stock market depends on whether or not they can continue to perform anywhere close to the 850% gain from the past five years. Hopefully, Tesla’s new status as a blue-chip company will attract more conservative investors as well as the host of ETFs (exchange-traded funds) and other passive and actively managed funds, which will dramatically expand the possible pool of Tesla investors. Therefore, if Tesla continues to execute their plans and receive the financial support of their new investor base, it will generate alpha (performance of an investment relative to a suitable market index).

The next company to make the top ten will be NVIDIA (NVDA). Founded in 1993, NVIDIA has grown to become a leader in the design, manufacturing of graphics processing units (GPUs), and other advanced computer hardware. Historically, the business has boomed on the back of mainstay industries like video gaming, data centers, and cryptocurrency mining, which make substantial use of their cutting-edge products: “NVIDIA is the pioneer of GPU-accelerated computing. We specialize in products and platforms for the large, growing markets of gaming, professional visualization, data center, and automotive. Our creations are loved by the most demanding computer users in the world – gamers, designers, and scientists. And our work is at the center of the most consequential mega-trends in technology” (NVIDIA Corporation–Home 2023). NVIDIA’s success in the AI industry potentially labels them as the backbone of the entire technology sector.

Although shares of NVIDIA have risen around 90% year to date, they are still down significantly from the all-time high of $333 per share made in November of 2021. NVIDIA’s next steps, however, may bring them back to the top: “The recent breakthroughs in generative AI bring a new level of versatility and insights to the enterprise. Now, the world’s most advanced AI platform—NVIDIA AI—brings cutting-edge advancements to every organization. With innovation at every layer—the AI supercomputer, AI platform software, and AI models and services—the possibilities are infinite. You can engage the platform at any layer and anywhere, across public and private clouds” (NVIDIA Corporation–Home 2023). The vision for NVIDIA is clear: deep learning from their GPUs has ignited the AI revolution and the GPUs themselves will act as the “brain of computers, robots, and self-driving cars” (NVIDIA Corporation–Home 2023). The beauty of the whole vision is that NVIDIA products span across a wide variety of industries, so their revenue streams are highly-diversified. Ranging from generative AI to data analytics to cybersecurity, the NVIDIA AI solutions create paths to preventing disease, generating human-level code, dialogue and images, and revolutionizing data analytics. NVIDIA has already seen success with their use of 10,000 CPUs to train their model for popular generative AI chatbot, Chat GPT. Furthermore, Trend Force believes “this could eventually scale up to 30,000 as the platform becomes more complex. Because NVIDIA's most advanced enterprise-level chips, such as the A100, can cost as much as $12,500, this has the potential to become a major growth driver–especially as more companies rush to bring their own AI platforms to market” (Ebiefung 2023). Their money-making efforts do not only rely on one product, however. Among the company's core segments, from Q4 2022, data center revenue for the quarter rose 11% from a year ago to $3.62 billion and while rising 41% to a record $15.01 billion for the whole year. Q4 automotive revenue was a record $294 million, up 135% from a year ago and up 17% from the previous quarter. The fiscal-year closed with a sharp 60% increase to a record $903 million from the segment. Other highlights from the recent quarter announced in February 2023 included returning $1.15 billion to shareholders in the form of share repurchases and cash dividends and bringing the return in the fiscal year to $10.44 billion. NVIDIA additionally forecasts that GAAP and non-GAAP gross margins are expected to come in at 64.1% and 66.5% respectively for the Q1 of fiscal year 2024 (NVIDIA Corporation–Home 2023).

After such a substantial rally so far in 2023, NVIDIA has reached a market cap of $669 billion, securing the top position in the GPU market. While strong research and development capabilities would not be able to make up for the extremely high 156 price to earnings ratio, in the case of NVIDIA, it is most likely justified (Yahoo Finance 2023). As the company faces the temporary challenges of inflation and cryptocurrency industry weakness, generative AI will continue to work to bring the company towards their next expansion. Regardless, no investor would choose to be blind to the risks associated with investing in NVIDIA. The company's valuation is based on their future growth potential, so there is always the risk that the company will not meet expectations. NVIDIA does face increasing competition from other companies, both traditional and new, such as AMD, Intel, and QUALCOMM.

As a main developer of AI, there is a symbiotic relationship between NVIDIA and every other FAANG stock; without NVIDIA success, FAANG companies do not have the means to innovate their own products. As of right now, AI is synonymous with the gold rush; even though the stock is expensive at these levels, these types of once in a generation type stock tend to outperform and the bull markets can go on for years. FAANG, as we know it, will cease to exist without the success of the companies who are developing the fundamentals of AI and Data. NVIDIA’s success, therefore, is currently and will continue to be FAANG’s success.

Some would say trying to predict which companies will be the largest five by 2030 is a fool's errand; The world is changing rapidly, and new technologies and businesses are constantly emerging. Companies that are able to adapt to innovate will be the ones that succeed. Regardless of the predictions stated in this article, any set of outcomes is possible: the current powerhouses could prevail; unheard of companies could emerge and experience great success; pre-existing companies could rise to the occasion. Regardless of the uncertainty, an investor’s decision falls down to how current data best reflects the future. The only way to know for sure which companies will be the largest five by 2030 is to wait and see. By understanding the trends and forces that are shaping the world, however, we can make informed predictions about which companies are likely to succeed.

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