Platform companies will continue to lead markets for the foreseeable future, and startups and mid-market companies who adopt platform-based business models will be best positioned to dominate their niches. For evidence of this, we turn to an interesting data point about platform performance in the S&P 500 Index.
As of midsummer 2019, there are 21 public platform companies in the S&P 500. Yet these companies make up 20% of the S&P 500’s net income.
These platforms represent just under 5% of the companies in the S&P, but the fact that they are responsible for such an outsized portion of the net income proves a key point: platforms at scale are the dominant business model, and with that dominance comes outsized profits.
Focusing only on the vague promise of big tech, without understanding why super-popular tech firms are disproportionately scaling, risks missing the forest for the trees. The importance of platforms to the U.S. economy, not to mention international markets, is quickly evolving. Platforms operate at relatively low marginal costs and are best suited to scale faster and further, representing a healthy outlook for startups and mid-market companies willing to adapt.
In 2015, we predicted that by the year 2040, a full half of the S&P 500’s income would come from platforms. We suggested that by 2020, 5% of the companies in the S&P will be platforms.
In the WisdomTree Modern Tech Platforms Fund (PLAT), 21 of the 70 constituent platforms are currently in the S&P. If only 4 more companies join the S&P, that second prediction will easily be met. Given the spate of platforms that have gone public over the last few years, this seems likely to happen.
We have also seen, through the turbulence of 2018, that platforms fare better than other types of companies in economic downturns, losing less value overall. They also rebound faster than other businesses as economic conditions broadly improve.
The dominance of platforms in other countries, especially their fast rise in emerging markets, suggests that we’re not looking at just a U.S.-specific phenomenon.
Consider the three Chinese tech behemoths, Baidu, Alibaba, and Tencent. BAT, as the three are often collectively referred to, are comfortably within the top 20 internet companies in the world. As of April 2019, they have a combined market cap of about $900 billion and control or back a significant portion of China’s unicorns. All three, of course, are platforms.
The platform advantages exploited by BAT are clear. Against the backdrop of a rapidly expanding economy, government investment in tech, and massive penetration of internet usage among the Chinese population, the Chinese tech giants have created a vast ecosystem of users and producers. They are leveraging their unprecedented growth to take over more and more consumer-facing sectors.
Platforms are also taking root in India. In the heat of international trade tensions and government restrictions on lending, the Chinese fintech market has slowed down somewhat while its Indian counterpart has claimed new ground. India is now the largest source of fintech funding in Asia. Indian platforms Paytm, BankBazaar and Flipkart are increasingly growing in market share in financial services and eCommerce.
Our predictions for the growth of platforms in the S&P 500 seem to be quickly becoming reality. Uber, Lyft, Slack, and Pinterest have all gone public in 2019 so far, and all four platforms already meet the $8.2 billion market cap requirement to join the S&P. We expect that, when these and other platform unicorns eventually do join, they too will account for an increasingly greater portion of the S&P’s performance over time.
While it will take a few years for the influx of platform businesses and hyper-growth startups to be reflected in the major indices, the bottom line is clear. If you want to understand where the U.S. and other economies are headed, and which companies are best positioned to rise to the top, keep an eye on platforms.
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