The five American tech giants are still the best way to bet on technology dominating the world trend

  At the end of July 2021, the five major technology giants in the United States have successively handed over their brilliant transcripts. Apple (AAPL), Microsoft (MSFT), Alphabet (GOOGL), Amazon (AMZN) and Facebook (FB) flourished during the epidemic, as evidenced by the latest financial reports. Between April and June 2021, these five companies generated a total of US$332 billion in revenue, an increase of 36% year-on-year, and their profits exceeded expectations. Surprisingly, except for Alphabet, the stocks of the other four companies were all sold after the earnings report.
  The phenomenon of stocks being sold off with eye-catching earnings reflects some of the paradoxes surrounding large US technology companies. More and more people are using the products of these companies, and they are becoming less and less popular. U.S. regulators and bipartisan lawmakers are reviewing each company, and they say they will take major actions to weaken their power. According to Evercore ISI analyst Mark Mahaney (Mark Mahaney) estimates that regulatory review has caused a 10% drop in large technology stocks.
  After booming during the epidemic, these technology companies are facing challenges brought about by the economic rebound, as companies and consumers may return to their old habits and ways of doing things.
  Large technology companies are in a crisis-ridden moment, but such a moment will eventually pass. The business models of the five technology giants are still the best in the world, and the stocks are relatively cheap. Although it will take some time for regulatory pressures to be relieved, the stocks of these five companies are worth investors.
  The five technology giants with the largest listings on the US stock market can provide investors with a way to invest in the most important trends in the global economy, including digital transformation and cloud computing, as well as the future of communications, entertainment, business, and work. .
  Cloud computing alone can promote Microsoft, Amazon and Alphabet to continue to grow from their current foundation.
  Walter Price, the head of the investment team of the technology sector of the mutual fund company Allianz Global Investors, said: “Cloud computing is the reason why I hold the stocks of the above three companies. Global companies are shifting computing to the cloud. This is a capability Businesses that have continued to grow for decades, over time, these companies can sell more products to customers.”
  Price, who has managed funds for Allianz for nearly 50 years, cited the example of IBM. In the age of computer mainframes, IBM had Leading the industry in technology spending.
  There was an old saying on Wall Street at the time: no fund manager would be fired for buying IBM stock. Price said that this sentence now also applies to Microsoft. IBM’s secret is to sell more software and services to more customers. Now, every company in the five major technology giants is following the same strategy.
  Of course, these companies also face challenges in the short term. Amazon’s challenges in the post-epidemic era are most obvious. Compared with the period of the epidemic, the growth rate of the company’s e-commerce business has slowed down. The momentum of Apple’s hardware sales has also faded, and the hardware businesses of the five major technology companies have been affected by shortages of parts and soaring transportation costs. Apple previously said that iPhone production may be affected by a shortage of parts.
Figure: The total market value of the five major technology companies currently accounts for nearly a quarter of the S&P 500

Source: Bloomberg. Drawing: Yan Bin

  High valuations are another worrying issue. Among the five major technology companies, Apple has the highest market capitalization at US$2.4 trillion, Microsoft has a market capitalization of US$2.2 trillion, Alphabet’s US$1.8 trillion, Amazon’s US$1.6 trillion, and Facebook’s US$1 trillion. The market capitalization of these five companies currently accounts for 23.3% of the S&P 500 Index.
  Although the market value is already very high, the stock prices of these companies are still rising. As of the end of 2019, their market capitalization accounted for about 18% of the S&P 500 Index, and since then the stock price of each company has risen by at least 70%.
  The five major technology companies are ruling the US stock market, but technology is also ruling our world. The five major technology stocks are still the best way to bet on this trend.
  However, even if there are signs that such risks have been reflected in stock prices, regulatory pressure has not disappeared. In June 2021, a federal judge dismissed an antitrust lawsuit filed by the Federal Trade Commission against Facebook, and Facebook’s stock price rose by 4%. (The Federal Trade Commission filed a revised version of the lawsuit on August 19.)
  Regulatory pressure from Washington is increasing, but some aggressive actions may be blocked in the courts. Some investors believe that the worst-case scenario is that technology giants are forced to spin-off, and doing so can actually release value and benefit shareholders.
  Long-term business trends can offset regulatory risks. For example, the 5G mobile network is still being launched, which will drive strong growth in smartphone sales, as well as a surge in the use of social networks and cloud applications.
  In addition, there are some uncertainties that have not yet been reflected in the stock price. If Facebook CEO Mark Zuckerberg’s vision of a “meta universe” comes true, all large technology companies will benefit.
  Apple is considering entering the auto market, and Alphabet may dominate the future of self-driving cars through its Waymo subsidiary. Both Amazon and Apple are trying to get involved in the medical and fitness fields. Facebook’s WhatsApp has about 2 billion users, and the company has not yet begun to try to make money from this business.
  The five major technology companies are all worth holding by investors, but the opportunities and challenges for each company are different. The following is a detailed dismantling of these five companies by Barron’s.


  Amazon’s current experience best illustrates the risks and untapped potential faced by the five major technology companies. Amazon’s stock price has been under pressure since the end of July, when the company said that as more and more people leave their homes to shop, the company’s e-commerce business growth is slowing.

  In addition, Amazon has recently been targeted by regulators and lawmakers. The Federal Trade Commission is reviewing Amazon’s plan to acquire MGM Pictures, and its biggest concern is whether it should allow Amazon, which is already very large, to become larger. If the Federal Trade Commission wants to block this transaction, then this will signal a change in the regulator’s attitude towards the integration of the technology industry. But in the long run, the obstacles to the acquisition will not affect Amazon’s stock price. Although MGM can be a good supplement to Amazon Prime Video, whether it can successfully acquire MGM will not have much impact on Amazon’s profits.
  Jeff Bezos, Amazon’s founder and then CEO, testified before Congress in 2020: “I think Amazon should be scrutinized. We should scrutinize all major institutions, whether they are companies, government agencies, or non-profits. Organization, our responsibility is to ensure that we can pass the review with outstanding performance. ”
  If investors are only concerned about the battle between Amazon and the regulator, then they will ignore other more important things. Investing in Amazon’s stock can provide investors with an opportunity to invest in the three most important elements of the current economy: e-commerce, cloud computing, and transportation logistics. Amazon’s advertising business is also growing, and it is also ambitious in healthcare and physical retail. The Wall Street Journal recently reported that Amazon is planning to open large department store-style retail stores.
  Although the current market value is as high as 1.6 trillion US dollars, but from the perspective of its cloud business alone, Amazon’s stock can be said to be not expensive. The growth of the cloud business Amazon Web Services is accelerating. By 2023, the business’s annual revenue may reach 100 billion US dollars. If calculated at a market-sales ratio of 15 times (most cloud application companies have a market-sales ratio higher than 15 times), the market value of this part of Amazon Web Services will reach $1.5 trillion.
  Amazon’s stock has been basically flat for a year. At a certain point, investors will naturally realize the company’s potential and push up the stock price.

  Since the end of 2019, Apple’s stock price has doubled and its market value has increased by more than $1 trillion. Apple’s sales for the third fiscal quarter ended June 30, 2021 increased by 36%, compared with a 54% increase in the previous fiscal quarter. These are the company’s two best sales quarters since 2012.
  At the same time, Apple is more diversified than ever. The latest iPhone 12 was a great success, with sales increasing by nearly 50% in the third quarter, but other businesses also proceeded very smoothly, with the Mac, iPad and wearable device businesses continuing to achieve double-digit growth. In the third quarter, Apple’s service business sales increased by 33%. Overall, the iPhone currently accounts for approximately 50% of Apple’s total sales, down from 66% in 2015.
  However, Apple also faces some short-term disadvantages. The company will launch a follow-up to the iPhone 12 in a few weeks. The product upgrade is not expected to be too large, and Apple has warned that it may be difficult to meet demand due to increased shortages of parts.
  Among the five major technology companies, Apple’s regulatory risks are most imminent, as the 30% commission charged by the company’s app store has attracted more and more dissatisfaction. Epic Games sued Apple on this issue, and there is no ruling yet. This issue has also attracted the attention of Washington. In July 2021, the attorney generals of 36 states filed a lawsuit against Alphabet’s Google Play Store, and a parallel lawsuit against Apple seems inevitable.
  Apple CEO Tim Cook said in his defense of the App Store in 2020: “For most apps, developers can get 100% of the money they make. The only apps that need to pay commissions are those that pass Apple devices acquire customers, and experience and consume these functions or services on Apple devices.
  According to the application tracking agency Sensor Tower estimates, Apple will receive 21.7 billion U.S. dollars in commissions from the app store in 2020, accounting for about 8% of its annual revenue Even if Apple is forced to halve the 30% commission, this is less than 5% of total revenue.
  Gene Munster, the managing partner of the investment company Loup Ventures, is optimistic about all the five major technology companies, but he is especially optimistic about Apple. He has followed up on Apple when he was an analyst at Piper Jaffray. He acknowledged that Apple’s growth rate is slowing down, but he thinks Wall Street’s view is too pessimistic. He believes that in the upcoming fiscal year 2022, Apple’s sales will still grow by 10%, while Wall Street’s forecast is 3.4%.
  For Apple’s investors, the possibility of Apple’s entry into the auto manufacturing sector is an uncertain factor. Munster believes that this possibility is less than 50%, but he said that if it does happen, Apple’s valuation will be greatly improved. Calculated on the basis of expected profits in the next 12 months, Apple’s current price-to-earnings ratio is 26 times, compared with Tesla’s (TSLA) price-to-earnings ratio of more than 100 times.

  During the epidemic, a large number of companies began to adopt digital processes, and Microsoft’s business was booming. The surge in demand for personal computers brought about by the trend of working at home has given a boost to the Windows business. It has also promoted a surge in the sales of Microsoft’s Surface series of tablets and notebooks, and the demand for Xbox video game consoles has also risen sharply. Thanks to the growth of the Bing search engine and LinkedIn, the company’s advertising revenue has even grown. As of the most recent quarter, LinkedIn’s annualized revenue has increased by more than $10 billion.
  But Microsoft’s core driving force is the growth of the Azure cloud business, which has grown by 51% in the most recent quarter. In addition, there is also the accelerated adoption of cloud version software, including Office and Teams communication suites.
  Microsoft CEO Satya Nadella (Satya Nadella) said in an interview with “Barron Weekly” recently: “I can’t imagine what the world would become without digital technology, cloud computing, and collaboration platforms like Teams. , Even five or ten years ago, I think we would be in deep trouble without these products.”
  Microsoft’s revenue for the fiscal year 2021 ending in June increased by 18%, and the company expects that revenue will be realized in fiscal year 2022. Double-digit “healthy” growth. Accompanying this steady growth is a high market value. Microsoft’s market value is as high as $2.2 trillion, second only to Apple. Based on the expected profit in the next 12 months, the price-to-earnings ratio is 33 times.
  However, for risk-averse investors, Microsoft is the company with the least regulatory risk among the top five technology companies. Microsoft was once the main target of antitrust regulators, but it is basically safe now.

  Online advertising is the main market for Alphabet (and Facebook), and although the business opportunities may not be as popular as cloud computing and smartphones, they are equally attractive. In the second fiscal quarter ending in June, Alphabet’s advertising sales increased by 69%.

  In the second fiscal quarter, YouTube’s advertising revenue soared 84% to $7 billion, which was on par with Netflix, which reported quarterly revenue of $7.3 billion. Netflix’s advertising revenue is expected to grow by 19% in 2021, reaching US$29.7 billion, while YouTube’s advertising revenue is expected to grow by 45% to US$28.7 billion.
  Alphabet’s growth potential has not been fully appreciated, the company’s Class A shares expected price-earnings ratio is only 26 times.
Table: The current total market value of the five major technology companies is 9 trillion US dollars

  Alphabet’s other businesses may soon receive attention. The company began to announce the performance of its cloud computing business last year, and the operating loss of the cloud business in the second fiscal quarter narrowed by more than half. Although the competition from Amazon and Microsoft is still fierce, the artificial intelligence and machine learning owned by Alphabet will become the key to promoting the growth of the cloud business, and Wall Street predicts that the business will grow by 51% in 2021.
  At the same time, the performance of core business search advertising is also good. Google is still the world’s largest advertising seller, and YouTube only accounts for about 11% of total advertising revenue.
  Google accounts for more than 90% of American Internet search visits, and such a prominent dominance has made Google a target of regulators.
  Alphabet is facing antitrust lawsuits from the Department of Justice and multiple state attorneys general. The company is accused of monopolistic behavior in search advertising, which is a threat to the company’s oldest profitable business.
  Alphabet called the accusation misleading, flawed and untenable, and said it would defend itself in court.

  Among the five major technology companies, Facebook has caused the most controversy. In recent weeks, Facebook’s practice of allowing misinformation about the new crown vaccine to circulate on social platforms has caused dissatisfaction with the White House. Some lawmakers believe this is under the guise of freedom of speech. However, Facebook is still a very attractive stock, and “Barron’s Weekly” made a special report on the company in its April cover article.
  Although Facebook’s stock price has risen by 30% in 2021, its expected price-to-earnings ratio is only 23 times. It is the cheapest of the five major technology stocks and only slightly higher than the S&P 500 index. However, Facebook’s growth momentum is still very obvious.
  Evercore’s Mahaney said: “Facebook’s profits are expected to grow by nearly 30% in the next three years. It is an extremely attractive stock. There are many factors that will drive the valuation up.”
  One area that has been overlooked by investors is Facebook’s The emphasis on e-commerce business. Facebook currently has 1.2 million active stores, and small and medium-sized companies can use Facebook’s huge social network to sell their products.
  Shopify (SHOP), which provides companies with similar e-commerce tools, is valued at US$183 billion, and Facebook’s valuation is expected to rise gradually over time.
  Seven years after acquiring WhatsApp, Facebook has promoted the service to the global market, and the company is slowly adding payment transfer capabilities to the app, making it a potential competitor to Venmo, a subsidiary of PayPal (PYPL).
  However, Facebook also faces some short-term problems. The company’s conservative CFO, David Wehner, warned investors that the company’s revenue growth will slow for the rest of 2021, even if compared with the revenue data of 2019 before the outbreak. There will be a slowdown.
  Apple’s adjustments to its privacy policy have resulted in more complicated advertising targeting on some Facebook mobile applications. Facebook said its third-quarter results may be affected by these changes.
  In addition, there are potential regulatory risks. A Facebook spokesperson previously stated that the Federal Trade Commission’s revised lawsuit against the company was “unfounded”, stating that “the Federal Trade Commission’s allegations were intended to rewrite antitrust laws, subvert the established expectations for merger reviews, and told the business community. , No transaction cannot be changed”.
  So far, the Federal Trade Commission’s actions have only been to emphasize the high threshold of supervision.
  Judge James Boasberg of the U.S. District Court for the District of Columbia wrote in dismissing the Federal Trade Commission’s original lawsuit against Facebook: “The Federal Trade Commission seems to want the court to recognize the traditional view that Facebook is a monopolistic company.”
  No Investors who paid attention to such lawsuits have reaped considerable returns. Since Barron’s first highlight of the regulatory threats faced by large technology companies in its October 2017 cover article, the average return on stocks of the top five technology companies has been 218%, compared with the return of the S&P 500 over the same period The rate is 84%.
  Even if regulators intend to continue to attack the top five technology companies, their stocks may continue to rise.