"The Pulse" -- #138 / Makings of a Trillion Dollar Company

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Market Update:

Makings of a Trillion Dollar Company

When I heard that SpaceX was tentatively planning to file for a $1T IPO, it caught me off guard. This is a private company that makes rockets, a trillion dollars is a lot of money…it’s kind of difficult to fathom the size of the stream of cash flow to command such a strong valuation. A trillion is: $1,000,000,000,000 btw.

Is it that easy to make money?

Maybe the value primarily lies in the company’s vision? Elon obviously in the context of SpaceX.

A trillion-dollar company is a new concept. Apple was the first publicly traded company to hit the $1t club back in 2018.

Let’s unpack what it takes to be worth $1tn.

First, the numbers:

This took AI a surprisingly long time to prompt and tbh I think the numbers are a little bit off, but are within a reasonable ballpark. The analysis was still completed 10x quicker than the time it would take me to manually do it.

Numerically, I only see two things: most of these companies trade above market and most of these companies boast strong profitability (exception of Tesla). Not much more of a story to tell from a numbers perspective.

Another blanket statement to make is that most of these companies fall under the Tech sector. This is by design, not by coincidence. I’ll explain more below.

The true makings of a trillion dollar company lie beyond the numbers. It comes down to 3 core elements:

-Insatiable Demand-

Let’s talk about Microsoft. To me, this is the perfect example of a trillion dollar business. MSFT sells a variety of hardware and software to consumers and businesses alike. You use a MSFT product / service every day and you pay a lot for it.

I spend most of my day in Excel, PowerPoint, and Outlook (~$100-$150 / yr just for access). All MSFT had to do was make the product once and drop a few updates = strong unit economics to invest across other areas of its business. I also don’t even blink about paying that subscription because it’s such a core need for my business. For example, the Premium Database is built entirely on Excel!

For most MSFT customers, it’s the utility that keeps them coming back. MSFT products / services are very useful and generally well-integrated. So, there is constant demand.

Constant demand, high prices, and strong scalability yield a strong foundational business to command a lofty valuation. However, that alone won’t get you to a trillion. You need the other two pieces of the puzzle as well.

-Adaptability-

Beyond selling core products and services, MSFT is really good at adapting to the needs of the market. Historically, there was a business concept called the ‘Innovator’s Dilemma’ which essentially explains that as a business matures, it sacrifices innovation to enhance profitability. Ultimately, a lack of innovation will lead to a lack of profitability as the business falls behind the demands of the market.

Think about Blockbuster. Why didn’t they push into streaming earlier? Because they were making fucking bank selling hard copies.

If you’re the owner of that business, are you taking your dividend today or are you reinvesting into a new speculative arm of the business?

Today, big companies like MSFT are not sacrificing innovation. They chase the next big thing, such as AI, and have the resources to build the best next big thing without taking significant financial risk.

ChatGPT became mainstream by the fall of 2022, MSFT released Copilot in March of 2023.

So, they were lagging by 4 months—that means nothing to a 50+ year old business. I’m not enough of a geek to tell you whether Copilot is better than GPT or Perplexity, but I do know that MSFT is miles ahead of other AI providers by virtue of its ability to integrate Copilot across its platforms.

The fact that I just open my laptop and immediately get thrown into Copilot without needing to search for it or enter a log-in makes it an infinitely more convenient option for me. Now it’s embedded in excel too.

MSFT adapted to the market and did so primarily by leveraging the cash flows from legacy business arms.

-Sellable Story-

The Microsoft story is simple and believable. Dominate the tech stack of businesses and consumers. Why is that believable? They already do it and they have proven the ability to adapt to the market’s needs to grow their competitive position. That’s a sellable story.

Will MSFT die one day? Maybe.

But I think that a Cretaceous-era asteroid or a global nuclear event have a higher likelihood of killing off a business like MSFT vs. some competitor / startup.

“Not all companies in the $1T club are MSFT, so what do they bring to the table?”

The opposite side of the coin is a more imbalanced $1T company like Tesla or theoretically SpaceX. The majority of their value lies in Elon and his vision to enable unprecedented change.

Is that wrong? Absolutely not, the guy has a super strong resume lmao. He just presents a different perspective of what a $1T company can look like. Either way, both Tesla and SpaceX share the other two principles of creating insatiable demand for high ticket products (less developed than MSFT, but the premise stands) and being able to adapt to market demands (Tesla is still alive vs. countless EV cos that have died in recent years).

^as mentioned previously, Tech companies are uniquely positioned to capture the 3 needs of being worth $1T. Some large industrials company doesn’t organically embody the characteristics needs to reach $1T without being a total monopoly.

Disclosure: Nothing written here is financial advice or should be used for investment decisions.

Net Operating Working Capital

Net Operating Working Capital can be a tricky subject...it still tricks up a lot of professionals today.

My quick points:

Net Operating Working Capital (NOWC) is a representation of the net resource excess or deficit a business has to fulfill daily activities (excluding cash and short-term financing).

If that's confusing, stick with me, I'll break down the components:

NOWC = Operating Current Assets - Operating Current Liabilities ✅

-Operating Current Assets: All current assets excluding cash ✅

-Operating Current Liabilities: All current liabilities excluding short-term debt ✅

Example: In year 1, a business has $20 of accounts receivable and $30 of accounts payable.

-Operating Current Assets = $20

-Operating Current Liabilities = $30

-NOWC = (20 - 30) = -$10 ✅

If in year 2, that same business has $20 of accounts receivable, and $40 of accounts payable-- its NOWC = (20 - 40) = -$20.

(-$20) - (-$10) = -$10 change in NOWC ✅

Effectively, this business is self-funded. 🔥

In this case, the business is receiving cash from customers quicker than it has to pay suppliers.

Amazon and Costco are classic examples of companies that consistently post negative changes in NOWC.

This is good, this yields positive FCF!

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