Understanding the Risks for Tech Giants and Implications for Endowment Portfolios
In recent years, the dominance of major technology companies has been a point of fascination and concern for investors and financial professionals alike. Firms like Microsoft, Apple, Google, and others within the "Magnificent 7" have demonstrated unprecedented growth and profitability. However, as these firms reach maturity, they are encountering the so-called “law of large numbers”—where maintaining the same level of exponential growth becomes not just difficult, but nearly impossible.
For non-profit endowments, the stakes are especially high. Tech companies have long been the darlings of growth portfolios, providing high returns that have funded vital institutional missions. But as these firms run into growth ceilings and engage in increasingly controversial practices, it is worth asking whether their value will continue to rise—or whether we are witnessing the beginning of a significant decline.
The Law of Large Numbers: A Growth Ceiling?
The law of large numbers is a basic statistical concept; in the financial world, it refers to the difficulty of maintaining rapid growth as a company scales. Early in a company's lifecycle, high growth rates are easier to achieve because the base number is relatively small. However, as companies grow, that base number increases, making the same percentage growth much harder to sustain.
Take Microsoft, for example. The tech giant has evolved from its origins as a software company into a sprawling enterprise with investments in cloud computing, artificial intelligence, gaming, enterprise services, etc. It has generated record revenue in recent years, but sustaining that growth at the same rate will become more difficult as the company continues to grow. In response, such companies are now turning to less conventional, and in some cases questionable, strategies to maintain growth, raising ethical and regulatory concerns.
Questionable Practices and Competitive Obfuscation
Microsoft's recent $650 million agreement with Inflection is a case in point[1]. While on the surface this might appear to be a straightforward business deal, it effectively allowed Microsoft to absorb a significant portion of Inflection’s talent pool, bypassing the scrutiny that a full merger would attract from regulators. The result is a merger-like outcome without the associated oversight.
This isn’t an isolated incident. Across the tech sector, we see dominant firms engaging in aggressive business tactics—ranging from acquiring competitors (or simply absorbing their talent, as in Microsoft’s case) to using their market power to disadvantage smaller rivals and expand market influence. Amazon has faced similar scrutiny, with allegations of using data from third-party sellers on its platform to launch competing products; Google has come under fire for leveraging its search-engine dominance to promote its own services over those of rivals.
These practices are designed to maintain growth and dominance in increasingly competitive markets, but they come at a cost. The customers and competitors affected by these tactics cannot be expected to stay silent. Governments and supervisory bodies across the world are starting to take notice, creating a growing regulatory risk for these companies and posing a significant risk to their future profitability.
Simply put, as more people and governments recognize these moves, the likelihood of regulatory intervention and competitive blowback increases.
The New Monopolies: Global Backlash and Decline?
These tech companies are increasingly viewed as new monopolies—firms that wield enormous power over their respective sectors in ways that were once unthinkable. What distinguishes these companies from traditional monopolies is their multi-tentacled approach, dominating not just one industry but many. Apple and Google control the smartphone ecosystem, Amazon dominates e-commerce, Microsoft is a major player in cloud computing, and Facebook rules social media.
This widespread influence has been both their strength and, increasingly, their Achilles' heel. Governments worldwide are taking action, filing antitrust lawsuits and launching investigations into monopolistic practices. In the United States, there are growing calls to break up these tech giants to restore competitive balance. The European Union has been even more aggressive, levying fines and implementing regulations aimed at curbing their power.
For endowments and long-term investors, these developments present a critical question: Are these companies poised for an inevitable decline? Given the increased scrutiny, legal challenges, and the growing difficulty of sustaining growth, it seems plausible. A broken-up Microsoft, Amazon, or Google would be far less powerful—and far less profitable—than the monolithic entities we know today.
The implications for portfolios are significant. Tech stocks have driven much of the market's growth over the past decade, but their inflated valuations may be built on unsustainable foundations. The question isn’t just if the bubble will burst, but when. As antitrust pressures mount and growth stalls, we may see significant downward pressure on stock prices.
Preparing for the Future
So, how should non-profit endowments respond to these challenges?
Diversification is key. Rather than relying heavily on tech giants for growth, endowments should consider allocating funds to sectors that may be less vulnerable to regulatory risk and market saturation. Emerging markets, infrastructure, and sustainability-focused investments offer the most promising alternatives. At Crewcial, we believe that companies poised for the future, anticipating impending needs while sustainably pursuing their goals, offer the resilience necessary for repeatable long-term outperformance.
Moreover, endowments should remain vigilant, watching for regulatory developments and shifts in market sentiment. While tech companies will remain profitable in the short term, the winds could shift at any, likely inopportune, moment. A carefully considered strategy, rooted in diversification and a broader understanding of risk management—one that accounts for the inclusion of a wide variety of perspectives—will help protect institutional assets from the potential downfall of these once untouchable giants.
As these firms grapple with the unsustainability of ever-inflating numbers, ever-more-questionable practices, and rising scrutiny from both the top down and bottom up, their future dominance is far from guaranteed. These tech giants may have defied gravity for years, but no company is too big to fail.
[1] Microsoft pays Inflection $650 mln in licensing deal while poaching top talents, source says | Reuters