Superstar companies – typically in control of their markets and pricing – represent both opportunities and threats when it comes to investing.
Many of today’s superstar companies are at the forefront of innovation and most are eager to expand. Most are highly profitable and their ability to sustain this can make them attractive propositions for investors. Their dominance, however, can undermine suppliers and labour markets, and their pricing power can jeopardise competition, both at the consumer and at the antitrust level.
It could be said that the rise of superstar companies is leading to a ‘winner-takes-almost-all’ economy. In the US, just 30 such companies generate 50% of all corporate revenues. Such a concentration of market power is undermining competition and distorting labour markets. Moreover, corporate mark-ups have risen from 18% to 67% over the last 40 years, reducing the share of profits available to workers.
What this means for investors
Selectivity is crucial when considering investing in current and potential superstar companies. Among small innovative start-ups, there is the risk that they will be left behind or are more likely to pose a credit default risk. Investors who can identify the large, successful companies with solid pricing power, and smaller companies that are on the rise, can benefit if they are willing to stay the course over a reasonably long investment horizon.
