So just how big are Amazon and Apple? So big that both companies (and a few others, like Google) are quickly approaching a milestone has never been reached before by any company, anywhere and at any time: a $1 trillion market valuation. To give some context, that valuation is bigger than the GDP of Florida and larger than the entire size of the economies of Norway, Israel and Greece...combined!

If you ask business experts how these companies managed to reach this milestone in such a relatively short amount of time (Amazon was founded in 1994, Apple in 1976) you'll be given many reasons.

For example, some will point to their multiple revenue streams. Apple's biggest comes from the iPhone (which represents about 70 percent of sales) but it also generates large profits from its other product lines, such as the MacBook and iPad as well as its wildly successful online music, storage and video services and retail outlets. Amazon, meanwhile, is far past selling books. The e-commerce giant now sells just about anything - from motion activated toilet nightlights to dental floss that tastes like bacon (because, how can you go wrong with bacon, right?). It also generates billions from its own online music, storage and video services as well as it's enormously successful web hosting arm, Amazon Web Services. Both companies are diversified not only in products, but in worldwide reach and sell their products and services to billions of people in hundreds of countries.

As a result of their success - and contributing to it - both companies have also created powerful brands which are recognized by just about anyone anywhere in the universe. Both brands - justifiably or not - have been shaped to represent quality, innovation and a certain amount of coolness that not only gives customers an enormous amount of confidence when buying them but has also served as a powerful tool for recruiting the very best and brightest employees from the finest universities and educational institutions around the world. Yes, people are a company's most important asset and Apple and Amazon, both considered two of the best companies in the world to work for, have built an enormously valuable asset in their workforces.

The companies share other trillion dollar qualities. They are both savvy and relentless marketers that know the value of spending billions to build recurring revenue streams like Amazon Prime and iCloud. They both are connected to iconic business leaders (Amazon's formerly nerdy CEO Jeff Bezos, who started the company from a small office and is now the world's richest man. Steve Jobs was...well...Steve Jobs). They both make it a point to consistently pay dividends to their shareholders. They both boast of a long list of strategic partners that provide incalculable resources with which to help them sell, service and develop value-added solutions for all of their products. Both companies are also known to be ruthless and unrelenting in their mission to dominate their markets and crush their competitors.

So yes, you could look at any and all of these factors as reasons why Apple and Amazon are becoming trillion dollar companies. But none of them are the biggest reason.

Look, I'm a nerdy certified public accountant and, by definition, what I most enjoy - just as my finance brethren on Wall Street - is looking at numbers. Of course, the numbers for both companies are good. If you read their financial statements closely and compare their operations with others you'll see that both companies' product margins and ratios of operating, general and administrative expenses as a percentage of revenues are excellent. But there's something else. There's one big, big, number that, to me, represents the reason why these two companies are worth so much money. It's the line item for research and development expense.

According to this report in Recode, Amazon spends the most on research and development ($23 billion) than any other company in the world. Apple is in 5th place at almost $12 billion but well ahead of other household names such as Johnson & Johnson ($10 billion), Ford ($8 billion), and IBM, who spent a measly $5.4 billion in 2017.

If you're an accountant or an investor, you know that research and development is not treated as a capitalized expense like buying equipment, a building, or even intellectual property in an acquisition. R&D is written off as incurred on a company's income statement and is ignored as an asset on a balance sheet. It's as if it has no future value. But is this right? I'm not going to argue the pros and cons behind the accounting rules. But I do argue that if you consider R&D to be a capitalized expense - money spent for the future - then the reasons why Amazon and Apple are valued so high become clear.

In Amazon's case, their $23 billion of R&D expense goes into developing technologies like Amazon Web Services for hosting data, voice-activated devices running Alexa, drones to deliver products, technologies to more efficiently manage warehouses and artificial intelligence apps that will be used to power Amazon Go, their up-and-coming self-running chain of grocery stores. Apple is investing billions in its personal assistant Siri, devices for running homes, wireless chargers, face recognition that will forever change security, wearable computers and other ground-breaking technologies that the entire world will be buying in the not-so-distant future.

Sure, both companies have had their misses (like anyone's going to take up Amazon's offer to have a delivery person enter their homes? And have you ever heard of Apple's Bandai Pippin? Didn't think so). But c'mon - no one will argue that their batting averages aren't higher than most and when they do hit the ball...wow...it's out of the park. You want to take a bet? Bet on these guys.

Yes, both Amazon and Apple are well-managed companies with incredible brands. But to me, they have an even better, more valuable quality to them: they both invest heavily in the future - more so than almost any other company. Smart investors will tell you that, on Wall Street, the past does not always equal the future and that stock prices more represent the future of a company's prospects, not necessarily last year's earnings.

When this is considered, and after taking into account all the money being spent on the future, is it any wonder that Amazon and Apple are valued so high?

Published on: Jul 25, 2018