Now that the dust has settled on the Alibaba IPO, we are not surprised to find the company sporting a ~$240 billion market cap, or Internet companies in Emerging Markets as a whole accounting for nearly $600 billion in total market cap.
But the bigger question remains: how much market cap will Internet companies in Emerging Markets create in the coming years?
One simple way to start answering this question is to look at how much market cap has been created by Internet companies in Developed Markets. Today, Internet companies in Developed Markets like the US account for ~$1.3 Trillion in public market cap. While it would be tempting to assume that Emerging Markets simply “catch up” to this over time and eventually get to $1.3 Trillion as well, this misses the bigger picture.
The bigger picture is this: over the next decade or so, Emerging Markets will account for 50% of the world’s GDP, 66% of the world’s growth in GDP, and 87% of the world’s population. So in all likelihood, Internet companies in Emerging Markets will account for a similar percentage of global Internet market cap over time as well, and grow to closer to ~$4-5 Trillion in market cap.
Let’s take a closer look at the numbers.
Today, in Emerging Markets there is nearly $0.6 Trillion of Internet market cap, which accounts for just over 2% of the total Emerging Market GDP of $27 Trillion. Meanwhile, in Developed Markets, there is $1.3 Trillion in Internet market cap, which accounts for 3% of total Developed Market GDP of $45 Trillion.
One could pretty comfortably assume that the market cap of Internet companies in Emerging Markets will one day also grow to ~3% of GDP as well. This would equate to $1.8 Trillion in Emerging Market Internet market cap by 2030, and would imply that another $1.2 Trillion in market cap will be created by Internet companies in Emerging Markets over the coming 10-15 years. Not bad.
But this math actually masks what is really happening in these markets. Let’s recall that as of today ~95% of Emerging Market Internet market cap consists of Internet companies from China – companies like Alibaba, Tencent, Baidu, and YY that are based in China and primarily service consumers from China. Today, the market cap of those Chinese Internet companies account for 7% of China’s GDP.
What if the rest of the Emerging Markets catch up to this, and Internet market cap in those countries grows to 7% of GDP (where China is today) instead of 3% of GDP (the average across Developed Markets)? Then Internet companies in Emerging Markets would be worth an astounding $4-5 Trillion.
We’ve already seen how Emerging Market companies like Alibaba can capture 3x the market share of their Developed Market peers, owing to less offline competition in Emerging Markets. Why wouldn’t the same ~3x delta be reflected in the market cap of those companies, and yield a market-cap-to- GDP of closer to 9% (China-type levels) instead of 3% (Developed Market-type levels)?
Below we have plotted what Internet market cap in Emerging Markets could look like over the next 10-15 years. In the light blue box is the estimate of Internet market cap in Emerging Markets (in $ Trillions). The numbers in the light blue box change based on what you assume happens to Emerging Market GDP (on the left axis, in $ Trillions) or Internet market cap as a % of GDP (across the top).
We’ve circled a few key numbers in red. At the top left of the light blue box is the current market cap of Emerging Market Internet companies: approximately $0.6 Trillion. Next, we’ve circled the two cases we described previously: Emerging Market Internet market cap in 2030 at average Developed Market levels (3% of GDP, which would yield $1.8 Trillion in market cap) and at China levels (7% of GDP, which would yield $4.3 Trillion in market cap).
At $4-5 Trillion in market cap, Internet companies in Emerging Markets would account for ~70% of total global Internet market cap. Sound crazy?
First consider that over the next 15 years (between 2014 and 2030) Emerging Markets will account for 66% of all new GDP created globally. That means that $2 out of every $3 in economic value created over the next 15 years will be created in Emerging Markets. Astounding.
What’s even more astounding is that come 2030, Emerging Markets will account for 87% of the world’s population, meaning that an even bigger percentage (likely close to 87%) of future value creation beyond 2030 will come from Emerging Markets as well.
To us, it seems pretty reasonable that markets which account for 66% of near-term value creation and 87% of total human beings on planet earth will also reflect ~70% of Internet market cap over time. Particularly when Internet companies in those markets have proven themselves capable of outpacing their Developed Market peers by a factor of ~3x.
So where will all of this Emerging Market Internet market cap come from? Quite logically, from companies that are currently privately-held. Perhaps this explains why over the last 12 months over $5 billion in late-stage venture capital has poured into Emerging Market Internet companies:
In short, we think that Internet companies in Emerging Markets are likely to create Trillions of dollars in market cap over the next decade or so. While one could argue whether this number will end up being $1 Trillion or $5 Trillion, either way, it seems pretty clear that a lot of market cap is poised to be created by Internet companies in these markets over the coming years.
Tell your friends at the Nasdaq and NYSE to get ready.
Sources: Rise Capital analysis; GDP data via WorldBank; Population data via United Nations; Market capitalization data via Bloomberg.
“Developed Markets” defined as United States, Canada, EU 28, other Central and Western Europe, Japan, Korea, Australia, and New Zealand.
“Internet Market Cap” includes only publicly-traded online software companies, and excludes integrated hardware + software companies like Apple, Samsung, Xiaomi, etc.