Big Tech rules the world. But will Alphabet, Amazon, Apple, Facebook and Microsoft—all now nearly trillion-dollar-plus companies that thrived during the pandemic— be lucrative investments in the coming years? Over the past decade, these five behemoths have changed how we play, shop, work and communicate. Their stock prices rose so quickly that they now account for about 25% of the S&P 500 Index and 40% of the NASDAQ 100.
But critics maintain that Big Tech’s sky-high valuations could mean a big fall…and that the companies are in the cross-hairs of federal antitrust regulators that believe they’ve eroded privacy and monopolized the digital economy and should be broken up. To help you decide what to do with the Big Tech stocks in your portfolio, Bottom Line Personal asked a panel of the country’s leading technology- stock experts to analyze each company’s pros, cons and overall potential.
Investors should consider buying shares of these companies at current prices…
Amazon (AMZN): The nation’s largest online retailer and a global e-commerce leader. Recent share price: $3,288.62.
Pros: Growth at Amazon Web Services— the company’s cloud-computing division, which deploys and manages data and services over the Internet—continues to accelerate with annual revenue expected to hit $100 billion annually by 2023. Amazon’s digital advertising business grew 87% year-over-year in its most recently reported quarter.
Cons: The company warned of a postpandemic hangover in e-commerce sales growth as the economy reopens and consumers return to brick-and-mortar stores. Regulators are scrutinizing Amazon’s pending $8.5 billion bid for the film studio MGM.
Outlook: With Amazon stock up only 1% this year,* investors may have doubts about the company, but I don’t. Even if online shopping revenues slow, the enterprise cloud computing market —millions of businesses moving data and software online—should power doubledigit annual revenue growth for Amazon for many years. And even if Congress forces Amazon to break up or divest divisions, the company’s separate pieces would be more valuable than the whole.
Chris Ward, CFA, is associate portfolio manager for the Gabelli Growth Fund (GAGBX), which has returned 19% over the past decade vs. 17% for the S&P 500 Index, Rye, New York. Gabelli.com
Microsoft (MSFT): The business software giant known for its Windows operating systems and Office productivity suite. Recent share price: $299.85.
Pros: Microsoft 365 should continue to dominate office-productivity software during its transition to a cloud-based service. Microsoft’s cloud-services division, led by Azure, generated $17.4 billion in a recent quarter, and Azure revenues were up 51% year-over-year.
Cons: The company remains somewhat tethered to the PC (personal computer) market, which is in decline and could impact the stock price.
Outlook: Microsoft stock is up 33% so far this year, but there’s still room for price appreciation. It’s not just the Azure juggernaut. Microsoft’s less-talked-about divisions offer avenues of growth including LinkedIn, the social-media platform for business professionals, which has $10 billion in annual revenue, and the Xbox and video-gaming business. Microsoft is more insulated than other Big Tech firms against the antitrust activity that is focused on online advertising and privacy issues.
Matthew J. Moberg, CPA, is manager of the Franklin DynaTech Fund (FKDNX), which has returned 22% annually over the past decade and ranks in the top 6% of its category, San Mateo, California. FranklinTempleton.com
Investors should consider maintaining any current holdings if they own these stocks and wait for pullbacks in share price before buying more…
Alphabet (GOOG): The parent company of the Internet search firm Google, which attracts nearly one-third of all online ad spending globally. Recent share price: $2,801.12.
Pros: Revenues, derived mostly from Google, reached $62 billion in the most recently reported quarter, an increase of 62% year-over-year. Advertising revenue this year from YouTube, Alphabet’s video-sharing website, is expected to rise about 45% to $29 billion versus last year.
Cons: Alphabet has racked up nearly $10 billion in European Union antitrust fines and faces multiple lawsuits from the US Department of Justice and state attorneys general.
Outlook: Shares of Alphabet have surged 59% in 2021 so far. The stock is no longer a bargain, but it still is compelling because of the enormous potential of the company’s lesser-known divisions such as Google Cloud (cloud computing) and Waymo (autonomous car technology). The outcome for antitrust legislation against Alphabet looks relatively benign because current antitrust regulations are outdated, and it is unlikely that Congress has the consensus or political will to overhaul the laws.
Ali Mogharabi is a senior equity analyst specializing in communications stocks at Morningstar Inc., Chicago, which tracks more than 621,000 investment offerings. Morningstar.com
Facebook (FB): The largest online social network, with three billion monthly users. Recent share price: $330.05.
Pros: Facebook had nearly $30 billion worth of revenues in its most recently reported quarter, most of it from online advertising. Facebook’s non-advertising divisions, such as e-commerce transactions on Instagram and its global messaging service WhatsApp, could provide substantial future growth.
Cons: The company’s plans for its own cryptocurrency, known as Diem— formerly called Libra—have been slowed by government scrutiny.
Outlook: Facebook has faced more social and political controversy than any other Big Tech firm, from spreading hate speech and disinformation to repeated criticism of its privacy practices. Despite all this, antitrust efforts have been largely unsuccessful. This past June, a federal judge dismissed two lawsuits that sought to have Facebook divest of its WhatsApp and Instagram units. (The federal government has refiled an amended version of the lawsuit.) Nevertheless, I am proceeding cautiously with Facebook stock because all the controversy is likely to keep share prices volatile and because the stock is vulnerable to pullbacks after rising 126% since its March 2020 lows.
Charles Sizemore, CFA, is chief investment officer of Sizemore Capital Management, Dallas, and coauthor of Boom or Bust: Understanding and Profiting from a Changing Consumer Economy. SizemoreCapital.com
Long-term investors should consider maintaining holdings of this company. Shorter-term investors may want to take some profits…
Apple (AAPL): The consumer electronics firm with iconic products such as the iPhone and iPad. Recent share price: $142.90.
Pros: Apple sales jumped 36% and profits nearly doubled year-over-year in a recent quarter. The next few generations of iPhones will benefit from the rollout of 5G wireless communications.
Cons: Apple has acknowledged that recent growth trends may not be sustainable past 2021 due to supply-chain challenges and semiconductor-chip shortages.
Outlook: Apple stock has doubled since the end of 2019, making the company the largest publicly traded firm in the US. But after those blockbuster gains, the current price and valuation are unattractive. Although the company has diversified with devices such as a watch and AirPods and it is reportedly developing an Apple automobile, it hasn’t produced “the next big thing,” another revolutionary product like the iPhone that can drive growth for years. And this past September, video-game developer Epic Games scored a partial victory in a case that accused Apple of being an illegal monopoly. A federal district judge ruled that Apple can no longer force developers that sell in its App Store to use the company’s own high-commission payment system. That could cost Apple billions of dollars a year in revenue.
Chris Ward, CFA.