August 27, 2018

What next for the tech giants?

It was only a matter of time before Apple became the first public company to be valued at $1 trillion. And following better than expected results the company, founded just over 40 years ago, saw that landmark valuation.

Apple’s shares jumped after it reported revenues of $53billion for the last quarter, having shipped 41million phones. And while that figure was below expectations the success of the more expensive iPhone X saw a jump in revenues.

Talk is already about Apple becoming the first $2trillion company, but where will that growth come from?

Apple’s business is still being driven by consumer demand for the iPhone – it accounts for 60% of the company’s profits – but it’s unlikely that it will retain that predominate position.

Growth is seen as coming from “services” and “other products” such as the App Store, Apple Pay and income from Apple Music. All of which have been growing rapidly, which is not surprising when you realise that Apple takes a 30% cut on everything in the App Store.

Apple is one of five key tech stocks which, collectively, are known as the “Faangs”. These include Facebook, Amazon, Apple, Netflix, and Alphabet, the owner of Google.

Over the past few months the value of just these five companies has jumped and they now amount to almost a fifth of total US GDP. The last time five companies were in such a ‘strong’ position in the US was in 1999, just before the tech crash.

Each of these five have had serious problems to contend with, however, and a number of analysts have wondered whether we are witnessing a tech bubble and a likely crash.

Each one is investing heavily in new technology, whether that’s developing driverless cars, artificial intelligence or machine learning, but despite that they are all still generating immense revenues and, when it comes to valuations of their stock, worries of a market correction appear to be overblown – Apple trades at 14 times expected earnings, while in 1999 Cisco was at 117 times earnings.

Some critics have argued that Apple’s hitting the $1trillion mark has been helped by massive cash reserves, supported by profits repatriated under the Trump Administration’s tax break schemes, to buy back its own stock.

They say that the company has become a one-trick pony, overly reliant on the iPhone and that the company is failing to innovate in the way it did under Steve Jobs. 

So what of the other companies on the cusp of joining Apple as one trillion dollar businesses?

A significant number of analysts point to the on-going success of Amazon and consider it a better longer-term risk than Apple. Not only has it revolutionised the way that people shop, but it has created a dynamic video streaming service and a profitable cloud computing wing.

AWS, the company’s cloud computing division, is making record profits up 1,286% year-on-year growth, due to the high margins that Amazon makes on selling computing time.

Amazon not only spans the retail space and offers cloud services it has also invested heavily in voice services such as Echo and Alexa.

Both Apple and Amazon are riding high and the parent company of Google, Alphabet, recently smash Wall Street expectations.

However, for some of these tech giants, clouds could be appearing. Facebook’s valuation tumbled by over $100billion as its growth slowed, in part as a reaction to the on-going scandal around its relationship with Cambridge Analytica, while both market darlings, Twitter and Neflix, disappointed analysts hit by either a slowdown in user activity or subscribers.

Interesting times, made more so by the impact of a possible trade war with China. While the tit-for-tat of recent weeks continues to escalate, President Trump has been talking of limiting Chinese investments in the US and restricting American technology imports to China In response the Chinese may decide to target US multinational directly.

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