In preparing for a keynote address for the NACVA 2020 Business Valuation and Financial Litigation Virtual Super Conference, I did some research on the public markets, focusing on the concentration of market capitalization in the largest firms. The results are fascinating. My Topic was Vision 2020: The Future for Our Profession and Your Role In It.
The universe of public companies has been shrinking over the last four decades or so. When I started in the valuation arena, there were more than 9,000 public companies. There were hundreds of IPOs every year, and the small brokerage firm I worked with participated regularly (multiple times most weeks) in selling shares of new public companies. In those days, a market capitalization of $100 million was sufficient to warrant being public (assuming earnings and a good “story” were present).
Today, there are about 3,700 public companies, the result of overall higher delistings than IPOs over many years.
The number of small IPOs ($100 million or less) has declined sharply, to the current range of less than 100 per year on average. The public markets are simply not an avenue for liquidity and capital for smaller companies like they were in the past.
Source: Wikimedia Commons
With the decreasing number of public companies, the market capitalization of the public company universe has become highly concentrated in the top 500 companies. With Google (Alphabet), Apple, Amazon, and Microsoft having trillion dollar-plus market caps, this is not surprising. What is surprising is the extent of that concentration in relatively few public companies. We examine that concentration in the following figure.
Including ADRs, there were 4,209 public companies in the Capital IQ database as of December 31, 2019. These companies had a combined market capitalization of equity of $35.5 trillion at year-end. I intentionally went to a pre-COVID date for this analysis. With four trillion dollar companies, the top 100 companies had a market cap of $19.6 trillion, or 55% of the total public company market capitalization.
The average market cap of this top 100, influenced, of course by Apple, Amazon, Alphabet, and Microsoft, was $196 billion. For perspective, the average market cap of the top 500 companies was $60 billion, and these 500 companies account for 84% of the total public company market capitalization.
That leaves 3,709 remaining public companies with a combined market capitalization of only $5.6 trillion, and an average market cap of $1.5 billion.
I found these statistics to be very interesting. So I looked at the earnings of these public companies for the full year (or last twelve months) of 2019. The 4,209 public companies earned a total of $1.3 trillion during 2019. How were those earnings distributed?
The top 100 companies earned 66% of the total earnings (net income) for the entire universe. The top 500 companies earned 96% of the total net income reported by the public companies for 2019. That was fascinating to me. That meant that the 3,709 remaining companies earned only a combined $57 billion, or 4.4% of the total. Looking a bit deeper, only 51 of the top 500 companies reported a net loss for 2019 (and the losses are included in the estimation of net income).
Of the remaining 3,709 companies, 1,794 companies, or nearly half of them, reported a net loss for 2019. That was also fascinating to me, and this result was pre-COVID. No wonder appraisers have such a difficult time identifying guideline public companies for valuation inferences in appraising private companies!
With the concentration of market capitalization and earnings in the top 500 publics, I asked the question of how the smaller company universe was faring during this pandemic we are all experiencing. To do so we looked at the performance of the S&P 500 Index and the Russell 2000 Index since year-end 2019.
Until the market’s recognition of the pandemic in late February, the Russell 200 and the S&P 500 indices were trading about the same. Both reflected a sharp drop in pricing during March, but the drop for the Russell 200 Index was sharper than for the S&P Index, creating a gap in relative pricing. That gap has been maintained since then, despite the fact that both indices have recovered substantially over the last four months or so. One reason for this relative underperformance can be inferred from our analysis thus far. With nearly half of the smaller companies losing money, being hit by the pandemic likely exacerbated some of their problems.
For a deeper dive into smaller public company earnings, take a look at Mercer Capital’s COVID Benchmarking Update (August 2020). My colleague, Travis Harms, is doing some very interesting work on Mercer Capital’s Family Business Director Blog.
Download the Benchmarking Guide here: 2Q20 Benchmarking Update.
I hope you find this analysis provides useful perspective on the public markets. Feel free to comment. I’d love to hear your reactions.