Market Cap Per Employee: Two Tech Surprises
One of the great things about incorporating employee data into your use of investment research tools is the ability to use the information to help spot companies with moats – the barriers to entry, or protective barriers, that limit direct competition, allow for pricing power and drive long-term and sustainable growth.
If you do a YCharts Stock Screener, using the S&P 500, and screen for market cap per employee, in the top 50 mostly what you get is not surprising: a bunch of asset-rich companies like REITs; extractive companies like oil and gas operators; a handful of pharmaceutical concerns that are smaller and thus less likely to hire on a huge sales force to roll out a drug; and tobacco companies. These have high market cap per employee because they don’t employ a lot of people.
They all have relatively high revenue per employee, as well.
Now it’s doubtful that any of these companies’ rank-and-file workers perform such valuable labor that they could go elsewhere and create similar amounts of market cap (save for the unusual technologist, a sought-after executive or perhaps a gifted salesperson). What the ratios show is the ability to get more – more revenue, more profit, more market cap – for relatively less human effort. The essence of the company has powerful sway in the marketplace.
It’s not so surprising to be looking at Apple, Priceline and Google on this list. They’re all tech companies that have demonstrated competitive advantage: Apple, even if it’s slipping, sells gadgets at prices few competitors can demand; Priceline got to the foreign hotel market in a big way before other travel middlemen and has invested hugely to stay ahead, notably spending billions in recent years to control Google search terms; and Google made itself the default search engine of the Web (where else would you go to search for “Hong Kong hotel”?).
Visa and MasterCard have been around a lot longer, of course, as bank-owned associations for many years before becoming publicly-traded, for-profit companies. With older companies, we expect to see relatively more workers because in decades past moats were built less with technology than with direct human effort. In this case signing up millions and millions of merchants to accept Visa and MasterCards. And that effort built a mighty fine moat. And Visa and MasterCard have been exploiting that in recent years.
As with most true moat companies, the stocks aren’t cheap, as measured by forward PE ratio. And, of course, the fat margins you see above attract a lot of capital wanting in to the payments industry. eBay (EBAY), through its PayPal, is a notable success. Bitcoins wants to be. And there are dozens of other companies that would like to make Visa and MasterCard obsolete.
That may happen. But for now, the two bank card companies enjoy enormous pricing power and little immediate threat to their worldwide merchant networks.
Tech, by the way, is full of companies with not-so-great per-employee ratios.
International Business Machines (IBM), even after slimming down 20 years ago, remains a huge employer and one that gets relatively low revenue per worker. Revenue growth has been hard to come by in recent quarters, so IBM is laying off a few thousand employees. It wouldn’t be terribly surprising to see the staff reduction grow soon if the revenue situation doesn’t improve.
Jeff Bailey, The Editor of YCharts, is a former reporter, editor and columnist at the Wall Street Journal and New York Times. He can be reached at firstname.lastname@example.org. Read the RIABiz profile of YCharts. You can also request a demonstration of YCharts Platinum.
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