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Investment potential and risks of technology companies

Updated: Feb 11, 2022



The combined market value of the top five technology companies is $9 trillion. Analysts predict further growth.


Amazon


Amazon best illustrates the current risks and untapped potential of the tech giants. The company's shares have been under pressure since the end of July 2021. At the time, Amazon said that e-commerce growth was slowing down as more people left their homes to shop.


Amazon under the gun of regulators and legislators. The Federal Trade Commission (FTC) is reviewing the company's proposed acquisition of MGM. The big question is, is it worth letting the big get bigger? If the agency tries to block the deal, it will signal a change in the way regulators approach technology consolidation. But don't expect the rejection to move Amazon stock long term. MGM films would be a nice addition to Amazon's Prime Video offering, but they won't affect the company's bottom line.


“I believe that Amazon should be rigorously vetted. We should rigorously vet all large institutions, whether they be companies, government agencies, or non-profits. It is our responsibility to make sure we pass that rigorous review with flying colors,” the founder and CEO said in 2020. then Amazon CEO Jeff Bezos.


Investors may miss the big picture by focusing on Amazon's battles with regulators. The company offers the opportunity to invest in three of the most important elements of the modern economy: online trading , cloud computing and transport logistics . Amazon has a growing advertising business and big ambitions in healthcare and retail. Last week, The Wall Street Journal reported that Amazon plans to open department store-style outlets.


Even at its current market valuation of $1.6 trillion, Amazon could be a bargain just because of its cloud business. The growth of Amazon Web Services is accelerating, and by 2023, the division's annual revenue could reach $100 billion. The market capitalization of Amazon's cloud business could reach $1.5 trillion. This means investors will get the e-commerce business and Amazon's nascent advertising business for next to nothing.


Apple


The company is now more diverse than ever.


Shares in the iPhone maker have doubled since the end of 2019, boosting the company's market capitalization by more than $1 trillion. In the second quarter of 2021, Apple's sales grew by 36%, after a 54% increase in the first quarter, the company's two best quarters since 2012.


Apple is more diverse than ever. While the latest iPhone 12 is a hit - sales are up almost 50% in the last quarter - everything else works too. The company continues to post double-digit growth in the Mac, iPad and mobile segments. The Apple Services segment grew 33% in the latest quarter. Overall, the iPhone now makes up about 50% of Apple's sales, up from 66% in 2015.


Analysts estimate a 50% chance of Apple moving into car manufacturing. This could be a "tangible multiple increase" for the stock.


Negative factors in the short term


In a few weeks, Apple will introduce the sequel to the iPhone 12. Minor updates are expected. The company has already warned of problems meeting demand due to a growing shortage of components.


Apple may face the most immediate regulatory risk. There are growing complaints about the high 30% commission on sales in the App Store. Epic Games has sued Apple over the issue. The case has not yet been decided, but the situation has attracted attention in Washington. In July, 30 state attorneys general sued Alphabet over fees, and a parallel lawsuit against Apple seems imminent.


Defending the App Store to lawmakers last year, Apple CEO Tim Cook said:


"For the vast majority of apps, developers keep 100% of the money they earn. The only apps that are subject to a commission in the App Store are those where the developer gets a new customer on an Apple device and where features or services will be used on an Apple device."


App tracker Sensor Tower estimates that Apple received $21.7 billion in commissions from the App Store in 2020, about 8% of annual revenue. Even if Apple were forced to cut 30% of commissions in half, that would be less than 5% of the company's total revenue.


Microsoft


Microsoft is thriving in the era of the pandemic - companies are moving to digital processes to ensure their survival during a period of closed offices and limited travel. The surge in demand for PCs driven by the work-from-home trend has fueled the growth of the Windows business. Sales of the Microsoft Surface line of tablets and laptops increased, as did demand for Xbox game consoles. Microsoft has even seen advertising revenue grow, thanks to the Bing search engine and the growth of LinkedIn. The latter brings in revenues of more than $10 billion a year.


But the main factors of development were:

  • growth of cloud business of company Azure - sales grew by 51% in the last quarter,

  • accelerated adoption of cloud-based versions of Microsoft software, including Office and a communications suite called Teams.


"I shudder to think what the world would be like if it wasn't for digital, the cloud, and collaboration platforms like Teams. Even 5 or 10 years ago, I think we'd be in deep trouble," the CEO said. Microsoft Satya Nadella in a recent interview with Barron's.


In June 2021 fiscal year, Microsoft's revenue grew by 18%. The company is forecasting double-digit revenue growth in fiscal 2022. Microsoft has a market capitalization of $2.2 trillion, making it the largest company in the world after Apple.


Microsoft is also the least vulnerable to regulation. The company was once a prime target for antitrust regulators, but it is now largely out of the regulatory debate.


Alphabet (Google)


Online advertising opportunities (Alphabet's core business) receive less attention than cloud computing and smartphones - but no less significant. In the second quarter of 2021, Alphabet's ad sales grew by 69%.


In the second quarter, YouTube ad revenue grew 84% to $7 billion. Comparable to Netflix, which reported $7.3 billion in quarterly revenue. Netflix is expected to increase sales by 19% this year to $29.7 billion , while YouTube's ad revenue will grow 45% to $28.7 billion.


"You pay market price for Google's core advertising business, and then you get the cloud and all the other businesses for free," said Mitch Rubin, chief investment officer at RiverPark Funds.


Some of Alphabet's other business lines may soon be in the spotlight. The company began publishing the results of its cloud computing division in 2020. In the second quarter of 2021, it cut cloud computing operating losses by more than half. Alphabet has a combination of artificial intelligence and machine learning - according to Wall Street, the key drivers of cloud computing growth of 51% this year.


The main business - search advertising - works great. Google remains the world's largest ad seller, with YouTube accounting for only about 11% of revenue.


Google accounts for over 90% of search queries in the US, and its sheer dominance in this space makes it an obvious target for regulators.


Alphabet has faced antitrust lawsuits from the Justice Department and several state attorneys general over alleged monopoly practices in search advertising. The company called the claims misleading, erroneous and dubious and vowed to defend itself in court.


Facebook


Facebook is causing the most controversy among the Big Five companies in the tech sector. The social media giant has drawn the ire of the White House in recent weeks over its handling of misinformation about the Covid-19 vaccine. Some lawmakers have spoken out about Facebook's violations of free speech. However, Facebook remains an attractive stock.


Even after a 30% gain this year, Facebook shares are the cheapest among the top five tech stocks and only slightly more expensive than the S&P 500. And the company is still in clear growth mode.


"For an asset that could see returns close to 30% over the next three years, I think that's very attractive. There's a lot of valuation for a stock where it's at right now," says Evercore's Mahaney.


One area that investors are overlooking is Facebook's growing focus on commerce. Currently, Facebook has 1.2 million active stores - small and medium-sized businesses can use the huge social network Facebook to sell their products. Shopify provides similar e-commerce tools for businesses and is valued at $183 billion, which is the kind of value Facebook could eventually earn.


7 years after buying WhatsApp, Facebook has turned the service into a global phenomenon. The company is gradually adding electronic payments to the app, turning it into a potential competitor to PayPal.


Difficulties may arise in the near future.


Facebook's staunchly conservative CFO David Wechner has warned investors that revenue growth will slow for the rest of 2021, even compared to pre-2019 levels.


Apple's privacy changes have made it harder to target ads in some of Facebook's mobile apps. The company said the changes could impact third-quarter financial results.


Actual and regulation. A spokesperson for Facebook called the FTC's revised lawsuit against the company "baseless" and said:


"The FTC's claims are an attempt to rewrite the antitrust laws and undermine long-standing expectations of merger review. An announcement to the business community that no deal is ever final."


In dismissing the FTC's original lawsuit against Facebook, Judge James Boasberg of the U.S. District Court for the District of Columbia wrote:


"The impression is that the agency expects the court to simply agree with the conventional wisdom that Facebook is a monopoly."


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