A Blog by Jonathan Low


Feb 27, 2022

The Reason the Big 5 Tech Firms Will Continue To Dominate

Despite recent market uncertainty, the Big 5 tech firms - Alphabet (Google), Amazon, Apple, Facebook (Meta) and Microsoft - will continue to dominate because their profit margins are exponentially superior to anyone else's, even as they continue to reinvest in products and services while innovating. JL 

Larry Light reports in CIO Magazine, image, Warner Bros:

For all the schadenfreude that the quintet has provoked, the fact remains that they still control just over a fifth of the S&P 500’s market cap. And they’re big for a reason: They dominate their corners of the technology universe, and likely will continue to do so. Alphabet has "an unreal monopoly." Apple keeps finding new ways to make money. Microsoft's cloud service, ranks second behind Amazon. 400 million use its Office suite. 85 million American households are Amazon Prime members. AWS leads the field by far. Facebook still is a powerful draw for advertising. Add in its $48 billion in cash. Also, Meta’s stock is trading at a price/earnings ratio of 16, similar to electric utilities.

The Big Five tech giants have gone from last year’s heroes to this year’s zeros, judging by Wall Street chatter. Their stock prices sure have taken a thumping. Thus far this year, as of Friday, they have slid between 5% (Apple) and 34% (Facebook parent Meta Platforms).

But for all the schadenfreude that the quintet has provoked, the fact remains that they still control just over a fifth of the S&P 500’s market cap. And they’re big for a reason: They dominate their corners of the technology universe, and likely will continue to do so.

Their stocks are still on the high side because their earnings (Meta’s last quarter aside) and revenues have kept on growing. Yes, some analysts forecast a slowing of their growth. But evidence is that they will be at the top of the heap for a long time, due to inherent advantages and their overweening size and power.

“Making a long-term bet against them is hard,” says Dave Mazza, head of product at investment house Direxion. “They are resilient, with robust earnings. You can’t not own them.”

Certainly, nothing lasts forever in commerce, and for tech, that’s especially true. Back in the1960s, Xerox, Eastman Kodak, and International Business Machines (IBM) were the tech stars. Nowadays, they are no longer anywhere near the top. In the 1990s, America Online (AOL), Compaq, and Digital Equipment Corporation (DEC) were in the charmed circle. Now, though, they are mainly memories.


The Big Five have headwinds, to be sure. High inflation is punishing their valuations, as much of their earnings growth is expected in the future, which means today’s earnings are less valued. Federal and state regulators and lawmakers, plus their counterparts in Europe, are also scrutinizing the companies for possible antitrust or other violations.

And nimble competitors are trying to horn in on key parts of their business. Microsoft, the ruler of office software, faces threats from Slack (now part of Salesforce) and Zoom Video Communications in workplace messaging. Microsoft has ditched its Skype for Business and is trying to make up lost ground with its new Teams offering.

All these woes are reflected in the five companies’ waning stock prices in 2022. Meta, its shares suffering a one-third plunge, is the worst off. Apple is the only Big Five stock to have lost less than the S&P 500 this year, down 5% versus the index’s 7.3%. Alphabet’s loss matches that of the benchmark, while Amazon is off 8.3%. Microsoft has tumbled 12%.

The Big Five were the primary beneficiaries of the momentum effect that animated the market in 2020 and 2021. As they were the surest bets, they accrued the most investor love. What a difference a few months make.  

The notion that they are washed up is bracing. They lack the oomph they once had, argued Mark Haefele, UBS’s CIO for global wealth management, in a research report. In sum, the five’s room to grow at their previous rate has run out. He wrote that they still “will have a big impact on overall index returns,” but they won’t expand as they once did.

Still Got It

One of the funniest scenes in the 2009 movie The Hangover has former heavyweight champ Mike Tyson inadvertently slugging actor Zach Galifianakis (who stole the boxer’s pet tiger—never mind). Impressed by Tyson’s knockout punch, a fellow reveler, played by Ed Helms, exults, “He’s still got it.” 

Despite their troubles lately, the Big Five continue to command an awesome edge. With immense leads in their core areas, strong earnings and revenue, and bounteous cash on hand, they can launch new initiatives or make necessary acquisitions with ease.

Let’s look at them in order of 2022 market declines:

Meta. The company, once known as Facebook (its ongoing primary product), has long been the relative runt of the litter among the top five tech giants; it’s the only one with a market cap below $1 trillion. Meta, which makes almost all of its money from ads, had $10.3 billion in earnings during the 2021’s final quarter, down 8% from the year-before period. And its revenue guidance for the current quarter is $27 billion to $29 billion, below the analysts’ $30 billion consensus. The projected first quarter revenue marks a comedown from the $33.6 billion in last year’s fourth period.

Facebook has seen a falloff in active users, as upstarts like TikTok lure some away and new privacy strictures from Apple and European governments deter others. Not helping was a whistleblower’s allegations, presented to Congress, illuminating the company’s shortcomings, as well its reputation as a font of misinformation and hate speech. Of course, it would’ve done a lot better earnings-wise if it hadn’t spent $10 billion last year on its bid to invade the metaverse, an endeavor that led to its name change.

The fact remains, however, that Facebook still is a powerful draw for advertising. Add in its $48 billion in cash, as of year-end 2021, and its robust buyback campaign. No one knows whether the metaverse push will pay off, but recall that Amazon was in the red for years as it bet on a huge surge in online retail purchases, which initially seemed unlikely. Also, Meta’s stock is way cheap, trading at a price/earnings ratio of 16, similar to electric utilities.

Microsoft. For the fourth quarter, the company’s revenue and earnings shot up 20% and 27%, respectively. The remote-work environments during the pandemic helped it, and if people return to the office, its enhanced offerings should also be a boon.

Microsoft’s critics say that its prospects ultimately are dim, as people prefer phones and tablets to PCs. On the other hand, sales forecasts for now look good for the firm, and 400 million use its Office suite. What’s more, Azure, its cloud service, is doing very well, ranking second behind that of Amazon. The company has a healthy return on equity of 49%.

Amazon. The e-commerce sales juggernaut of the pandemic, Amazon has established itself as the go-to destination for retail buyers in need of everything from toothpaste to stereo systems. An estimated 85 million American households are Amazon Prime members. At the same time, Amazon Web Services, its cloud operation, is wildly successful; AWS leads the field by far.

As befits a retailer, Amazon’s profit margins (7%) are smaller than its four peers, whose tech-oriented fare pushes their profitability to around 30%. And its 47 P/E means it is hardly a bargain—that’s the highest multiple among the Big Five. But the company’s willingness to spend big, whether on server farms for AWS or warehouses (er, fulfillment centers, in Amazon-speak) shows that it has great staying power.

Alphabet. The Google owner plans to split its stock, whose current price is $2,706, 20:1 in July. Thus, for every share you own, you’ll get 19 more. Search, of course, is the central activity of this company. The reason it changed its name in 2015 is much the same as for the Facebook–Meta transformation: It wanted to give new visibility to its many new ventures.

No one can criticize Alphabet’s financial performance. The company blew past Wall Street’s estimates for the fourth quarter. Revenue was up over a third, year over year, while earnings were up by a similar amount.

Here, Alphabet has an overweening superiority to anyone else. “They have an unreal monopoly,” said Julie Biel, a senior research analyst and portfolio manager at investment firm Kayne Anderson Rudnick.

Apple. The House That Jobs Built never seems to suffer from boredom setting in over its products, particularly its iconic iPhone. The latest version, iPhone 13, has raked in huge sales. Blowout earnings have contributed to its luster. They handily beat expectations for the fourth quarter. Revenue catapulted 11%. The firm’s products “are a consumer staple,” Direxion’s Mazza said.

Skeptics have long anticipated that the shine would come off Apple, but the company keeps finding new ways to make money. The latest is an iPhone app called Tap to Pay, which will allow consumers to easily make purchases through Apple Pay—and aims to be a big competitor to Square. Another example: While chip shortages have vexed its equipment production, the company plans to open its own semiconductor manufacturing center.

One phenomenon that covers all the Big Five, Mazza noted, is that when the cold winds blow “they all will get hurt at the same time.” But as the years before 2022 showed, the opposite also is true. It stands to reason that will be true for some time into the future, as well.


Post a Comment