Big Tech Stocks
BY Chris Andreou|August 31, 2021
Big Problems, Enormous Potential
In July, America’s tech titans put on an impressive show of might. After thriving during the worst of the pandemic, Apple, Amazon, Facebook, Microsoft and Alphabet all reported earnings that shattered expectations and left no one in doubt about who the real juggernauts are in this economy.
The five giants raked in $322 billion in turnover during April and June, up 36% from 2019. Every company reported profits that were higher than expected. And yet, when their earnings were released, every stock except Alphabet sold off on the news.
The seeming contradiction reflects the wider questions at play for America’s Big Tech. Their revenues are swelling to record highs, their products are being used by more people than ever before – yet the companies themselves are looked upon with increasing suspicion by users and lawmakers.
Regulators have threatened to kneecap the stronghold that these tech giants hold over the media landscape. In addition, as the pandemic recovery continues cautiously, investors fear that a return to more analogue habits could spell the end of this particular golden era for these golden geese.
It’s worth asking, however, if the recent sell-offs are more drama than drastic. As a collective, the five giants are still the largest in the US by some margin. In addition, they sit at the frontier of America’s future: cloud computing, digital transformation, e-commerce, communication and work.
Big Tech, Big Problems?
For certain, there are short-term challenges for these companies.
Amazon looks the most vulnerable to a post-pandemic hangover, as e-commerce is growing at a slower rate than in the past. The demand for Apple’s hardware that exploded during the pandemic has cooled. Meanwhile, each of the five is feeling the strains of component shortages as well as burgeoning shipping costs.
To boot, many investors are now seeking peak valuations. The five companies now account for almost a quarter of the entire value of the S&P 500, and investors are begging the question: how long can this last?
But then, these companies have always had their sceptics, many of whom have spent the better part of the last decade waiting for the big five to fail big. And each year, they continue to be confounded. Since 2019, every stock has enjoyed a 70% increase or more.
Each company has different challenges and different opportunities. What’s certain is that while big tech continues to assert its dominance over the market, technology is doing the same to the world. And American tech companies remain the best way to bet on or against the trend.
Let’s have a closer look at the big five.
Amazon is an excellent illustration of the risks as well as the untapped potential of the group. Its challenges include a slowdown in e-commerce growth, as people return to in-store shopping. The company is also in the crosshairs of regulators – the FTC has been roadblocking Amazon’s acquisition of the MGM film studio, with Jeff Bezos hauled before congress to testify on the matter last year.
But traders would do themselves a disservice to focus single-mindedly on Bezos’ tussle with lawmakers.
Amazon is firmly entrenched in several of the most important sectors of the modern economy: cloud computing, e-commerce, logistics and advertising. It also has growing ambitions in other important areas, such as physical retail and healthcare.
Some analysts argue that just based on its cloud computing division alone, Amazon is undervalued. The stock has been flatlining for almost a year – at some point, it may shoot back up.
The world’s most highly-valued company is facing several near-term obstacles. It is expected to unveil its new iPhone in a few weeks, but the upgrades on the iPhone 12 are expected to be less than awe-inspiring. Component shortages have hampered its development, and the same issue may spell trouble when it comes time for rollout. It is also expecting the court’s decision in an important lawsuit filed by Epic Games over its 30% commission charge on the App Store.
All in all, however, Apple is in resplendent health. The maker of the iPhone has seen its market capitalisation double since the end of 2019, with more than $1 trillion added to its value. It continues to enjoy robust double-digit growth for its Macs, iPads and wearable technology, and its services division also grew by 33% in the most recent quarter.
Meanwhile, it’s been projected that even if Apple was forced by a court order to halve its current commission on the App Store, that revenue would account for less than 5% of total revenue.
At Microsoft, business has been booming in the pandemic era, as more companies onboarded its technology in order to survive the shuttered offices of lockdowns.
All of Microsoft’s major divisions were boosted by the work-from-home trend: its Windows operating system and licenses for its Office 365 products burgeoned, sales of Surface tablets and laptops rose, and the demand for its Xbox console skyrocketed.
Most importantly, its cloud computing division, Azure, was up 51% in the last quarter. Azure is expected to be the single largest contributor to the company’s growth in the coming years.
And once considered the Moby Dick for regulators on the hunt, the harpoons have since been blunted as focus shifted almost entirely to its Big Tech siblings, Alphabet and Facebook.
Somewhat ironically, the world of advertising gets comparatively little attention in Wall Street media. But opportunities for investors abound in this space. Only last quarter, which reported in June, Alphabet grew its ad sales by an eye-watering 69%. Revenue from YouTube ads soared to $7 billion, putting that single product alone almost on par with Netflix.
Yet even that figure is dwarfed by Alphabet’s main money-spinner, Google. The search giant remains just that, pulling in more than 85% of the company’s advertising revenue. Google accounts for more than 92% of searches globally in the countries where it is not blocked.
All of which naturally attracts the attention of regulators. It is facing down new anti-trust legislation over its search monopoly and has vowed to defend itself in court. The next one to three years will be critical for Alphabet.
Facebook is likely the most controversial of the Big Tech firms. During the covid pandemic, the company has been criticised on both sides for either its perceived lack of action against covid misinformation or its heavy hand in blocking expressions of free speech. And through it all, the stock has remained a compelling opportunity.
Facebook is facing some genuine issues that it will need to figure out. Changes to privacy on Apple products and services have thrown a spanner into the works of how Facebook shows ads. Meanwhile, regulators are sharpening their knives for what is seen as the baddest of all the big players. It is currently staring down the barrel of a revised lawsuit by the FTC, having already fended off the regulator’s initial action.
Facebook’s growing focus on e-commerce should hold it in good stead. With more than 1.2 million active shops, small and medium-size businesses have not been shy in selling their stock to the enormous social network.
Meanwhile, seven years on from its acquisition of WhatsApp, the app is a global powerhouse. Quietly, the company has been working on adding payment transfers to the app, which would see it rival online payment services such as PayPal and Revolut.
Even after gains of 30% this year, Facebook stock is considered a bargain by many analysts and remains in growth mode.
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