A small fraction of all companies is responsible for the majority of wealth creation in the stock market over the long term: A recent study of 28,000 U.S. firms shows that almost all net shareholder value created between 1926 and 2022 was attributable to only 2% of the sample.
Leading the pack in terms of total value generated—over the entirety of the nearly 100 years studied—are digital technology players, specifically, the “MAMAA” companies (Meta, Amazon, Microsoft, Apple, and Alphabet), which now constitute more than a quarter of the value of the entire S&P 500. All five are currently among the 10 most valuable firms worldwide—with Nvidia and Tesla rounding out the stable of tech giants among the top 10. Across the Pacific in China, players like Tencent, Alibaba, and privately held ByteDance lead the valuation rankings.
Stumbling blocks for the tech sector
Recently, however, the growth promise of the technology sector has seemed less certain. In China, the government launched a crackdown on its tech champions and their superstar CEOs, enhancing data privacy measures and increasing its antitrust vigilance. Now, the CCP is putting pressure on digital entertainment players by severely restricting internet usage for minors. In the U.S., increased public scrutiny over the impact of social media (which is alleged to cause depression and contribute to social polarization) is putting pressure on players like Meta, while Amazon finds itself facing a landmark monopoly case.
Rising geopolitical tensions are also affecting tech players—from the Biden administration doubling down on export controls of advanced chip manufacturing equipment to China, to the much-discussed TikTok ban, or the recent calls to halt a partnership between Ford Motor Co. and Chinese battery manufacturer CATL.
Finally, there are the layoffs, now totaling over 400,000 workers through 2022 and 2023 (or roughly 4% to 5% of the total US tech sector workforce). While these are partially correcting for pandemic-era over-hiring, they also reflect a shift in investor focus from long-term promises to short-term payoffs, in reaction to increased interest rates that make riskier long-term investments less attractive. Higher rates have also contributed to the current venture capital “winter,” in which deal counts and values have fallen to 2020 levels and startup exits as well as capital raised are at long-time lows.
Given these significant headwinds, it is no wonder that Fortune’s ranking of the 100 Fastest-Growing Companies is no longer dominated by the tech industry. The top 10 are now firmly rooted in the physical realm, selling building materials or wires, refining steel, manufacturing cars, or drilling for oil. Only 17% of the included players are from the tech industry—roughly the same representation as, say, the energy sector—while the MAMAA companies are nowhere to be found.
Does this indicate that tech is no longer the growth engine of the economy? Or, as Fortune CEO Alan Murray suggested, will the trend towards dematerialization and digital technologies continue?
Tech evidence from the Future 50
A look at the data suggests that technology will remain a key growth engine. The Future 50—an annual ranking, co-developed by Fortune and BCG, which assesses the long-term growth prospects of the world’s largest public companies—continues to be dominated by firms from the IT and communications sectors. Those sectors have consistently captured around half of the top 50 spots since the ranking’s inception in 2017. So far, the promise of growth potential of the Future 50 has consistently borne out, with all annual cohorts outperforming the S&P 500 as well as the S&P 500 Growth indices on revenue growth.
How can we reconcile the headwinds the tech sector is currently experiencing with its high future potential?
For one, there is a difference of time scales. In the short term, economic and geopolitical turbulence has created significant stumbling blocks. But in the long term, the invention and proliferation of new technologies will continue to drive improved standards of living, as it has throughout human history—and it will unlock growth and profits for the companies that provide these technological solutions.
Moreover, it is worth differentiating between technologies, which are not equal in terms of the growth potential they create—as a closer look at the 2023 Future 50 reveals.
On this year’s list, B2B-software providers, which are enabling the AI revolution, achieve particularly strong representation (e.g., cloud firms like No. 1 Snowflake or No. 6 Cloudflare, cybersecurity players like No. 2 Datadog or No. 3 Crowdstrike, and big data analysis firms like No. 18 Palantir). This is consistent with the valuation rally driven by generative AI that several tech giants experienced in 2023. Also well-represented among the Future 50 are cleantech players (e.g., EV manufacturers No. 5 Li Auto and No. 13 NIO, and solar panel as well as battery manufacturers such as No. 10 EVE Energy, No. 12 Sungrow, and No. 17 Suzhou Maxwell), as the global demand for sustainable technologies continues to rise.
However, merely embracing the most-hyped technologies will not be sufficient for companies to achieve sustainable growth. So, how can companies turn technology into competitive advantage—and how can investors separate the wheat from the chaff?
Turning technology into advantage
It is prudent to recall the AI boom of the 1980s, which was centered on “expert systems” that were meant to emulate human problem-solving in highly specialized domains, following rules defined by experts—for example, identifying compounds based on spectrometer readings.
In business, the most famous such system is XCON, deployed at computer manufacturer Digital Equipment Corporation to automatically select components based on customer requirements. It reportedly saved the firm around $25 million per year by reducing errors and enhancing the speed of the assembly process. As a result, corporations around the world began to develop their own expert systems and a hardware industry sprang up around these investments. However, most companies were unable to identify use cases for their systems or found that the costs of upkeep were prohibitive. As such, more than 300 AI companies had shut down or been acquired by 1993, ending the first commercial wave of AI.
To create value, new technologies need to be embedded into specific applications, and be accompanied by revolutions in operating and business models, which ultimately weave them into the wider social fabric. For example, a spark plug, in isolation, is not a revolutionary technology. Placed in an internal combustion engine that powers a car, that is driven by a person, within a society that has roads, traffic laws, and a culture of automobile use, it reveals its revolutionary potential.
Similarly, the MAMAA companies were able to turn the technology of the internet into mammoth valuations only by creating digital platforms and assembling an ecosystem of suppliers, contributors, as well as customers that used and benefited from them. This, in turn, required defining new ways of not just capturing, but sharing value among ecosystem participants, and developing new forms of leadership across the ecosystem that relied not on authority, but cooperation.
Four prerequisites for advantage
Our research has identified four prerequisites for how to apply technologies in a way that unlocks advantage—and the Future 50 companies demonstrate how to put them into practice.
1: Identifying a specific application
For one, an explicit thesis for how a new technological solution will create value for customers is required. For example, how can the technology be applied to help customers execute existing “jobs to be done” to a higher level of quality, or to make new valuable jobs feasible?
Many companies are now exploring the implications of generative AI for their business—with CEOs having major fear of missing out—but many limit themselves to identifying potential efficiency improvements (e.g., enhancing the productivity of software developers). As the technology becomes more widely available, any advantages it enables in terms of operational efficiency will be erased.
Recognizing this, Future 50 No. 2 Datadog is not content creating large language models (LLM), but rather developing tools that allow its customers to monitor and optimize how their proprietary models perform.
2: Defining a unique approach
Moreover, companies need to deploy their technology in a way that is difficult to replicate. This is particularly crucial with technologies that are “born commoditized,” like LLMs, many of which are open-source.
For example, No. 48 Spotify realized that the value proposition of a music streaming service would not only be the ability to instantly access songs listeners already know, but also the ability to discover new artists or albums they may enjoy. It developed “Discover Weekly,” a personalized playlist of recommended new music—predicting songs an individual may find appealing based on data collected from millions of users exploring Spotify’s catalogue. By facilitating customer exploration, Spotify has created a source of competitive advantage that depends on the size of its userbase and the power of its algorithms—which are more difficult for competitors to imitate than the breadth of its catalogue or the reliability and sound quality of its app.
3: Capturing and sharing the value
Next, companies need a plan for monetizing their new offerings. For example, building a website in the late 1990s did not automatically translate into increased value generation (though not having a website could be disadvantageous). Recognizing this, companies like Alphabet’s Google are now racing to define how to monetize GenAI tools—as their current main revenue driver, advertising, seems to be less appropriate for use with chatbots than traditional web search.
In a world dominated by business ecosystems, companies also need to ensure that their approach to value capture does not alienate other participants. For example, No. 9 DoorDash has defined a system in which value is provided to all players on its platform: Buyers gain convenience; merchants and payment providers unlock an additional revenue stream; and Dashers get access to a flexible work model.
4: Renewing the advantage
Finally, companies need to be able to renew their competitive advantage when others catch up. The MAMAA companies have all embraced this, evolving substantially over time by embracing new growth engines at critical junctions. Microsoft CEO Satya Nadella, for example, pivoted his firm’s software business from a product to a service model.
The Future 50 also embody this virtue. No. 14 Snap has long been a pioneer in social media, with competitors like Meta copying several of its features over the years. In an ever more crowded space, Snap keeps exploring new avenues to monetize and expand its userbase: For example, it recently struck a partnership with Amazon Fashion, in which shoppers browsing eyewear products can use Snapchat’s augmented reality features to virtually try on glasses.
Similarly, No. 49 CATL, the largest global manufacturer of lithium-ion batteries, has started pivoting to sodium-ion batteries, which rely on more abundant materials and are cheaper to produce. The firm announced it would start mass production this year, with the new technology being included in production cars in China as of Q4.
The importance of the operating model
Technology guru Andrew McAfee posits that underlying the remarkable performance of the Silicon Valley giants is not just that they are at the center of a technological revolution, but also, that they are leading a revolution in how business is done—which he describes as the Geek Way.
Our analysis confirms that the Future 50 tech players share several cultural and structural characteristics which heighten their grow potential and help them avoid a descent into bureaucracy. They invest heavily in R&D and, as a result, have larger and higher-quality patent portfolios; they have relatively youthful and stable leadership; they have leaner corporate structures; and they have a more pronounced long-term strategic orientation. For the Future 50, we assess that orientation with a natural language processing-based approach, weighing the frequency with which company leadership discusses short-term vs. long-term issues in official filings.
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Despite significant short-term headwinds, technology is poised to remain the growth engine of the global economy. However, as AI and other technologies—like cleantech and synthetic biology—are set to change business and the world, investors should remain prudent: Embracing these technologies will not be sufficient for companies to gain an advantage—rather, unlocking sustainable growth will require identifying an application of these technologies that solves a valuable problem, a unique deployment towards this end, a way to capture and share the value that is created, and a capacity for continuous renewal.
