Earnings

Tech Stocks Are Expensive, but There’s Room to Grow

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As technology stocks have soared amid the pandemic and subsequent economic reconfiguration of the last 18 months, many analysts have warned of a 2001-style bubble brewing. Large-cap technology stocks were wildly overvalued, they said. A correction was imminent. 

This week of company earnings has likely crushed some of those fears, but not because it allayed all concerns of frothy valuations; rather, because the growth of dominant tech stocks looks increasingly unstoppable.

To start, consider the sheer scale of the numbers. Alphabet (GOOGL.O) reported that Google’s advertising revenue soared by nearly 70% to $50.44 billion during the second quarter, while ad revenue for YouTube jumped 83.7% from a year ago to a whopping $7 billion. Competitor Microsoft (MSFT) saw its quarterly revenue rise 21% year-over-year, and its net income jumped by a staggering 46%.  

The same went for Facebook (FB) as it clocked a second-quarter net profit of $10.4 billion (about double what it made last year) and revenue growth of a casual 56%. Apple (AAPL) had a phenomenal quarter too: its quarterly revenue of $81.4 billion was up 36% from a year earlier, and the company beat analyst expectations in every major category. Amazon (AMZN) missed its revenue expectations, but quarterly profit still grew by an impressive 50%. 

Investors have nodded along to these gains. All five stocks are at (or near) their all-time highs. Even so, there are considerably worse places to park your cash right now than these companies. 

For one, the enduring allure of tech stocks is a symptom of the low-interest rate reality we’re (still) operating in. The Federal Reserve announced this week that it would be holding interest rates near zero and continuing its bond buying program for the foreseeable future. This is good news for large technology firms and their share prices: Not only can the companies issue cheap debt, but investors will continue to earn next to 0% interest from their savings account. Large cap index funds and shares of household companies are attractive alternatives for yield-hungry retail investors.  

Second, these companies are primed to grow even bigger in today’s global economic environment, in which Covid-19 continues to shape consumer behavior and economic policy. The rise of the contagious Delta variant has renewed concerns about the coronavirus here in the United States, causing the CDC and state governments to reverse prior policies on masking and companies to rethink in-office work policies. More people working and living from home means more time on technology platforms. Indeed, Delta is exacerbating and prolonging the state of the pandemic globally as well. Of course, these technology giants are global in scope, and much of their growth nowadays is from international markets. The pandemic may be bad for the human condition, but it seems to be good for technology firms’ bottom lines. 

Third, there is an element of too-big-to-fail. Microsoft, Apple, Amazon and Alphabet cumulatively represent about 20% of the entire weight of the entire S&P 500. “Tech won the pandemic and now may never lose,” headlined a widely shared New York Times article this week. Indeed, in an information economy where network effects solidify dominance, incumbency is the ultimate advantage.  

Perhaps the biggest risk factor for these stocks is the growing tide of antitrust sentiment. The Justice Department and Congress are investigating how the internet giants accumulated their market power. The new Federal Trade Commission Chairwoman Lina Khan is determined to hold the big tech firms accountable. But any action is far off. In the meantime, the dominant technology companies are poised to get even bigger, like it or not. 

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

John Hyatt

John Hyatt is a freelance journalist covering financial services, market structure, stocks and IPOs, and private equity. Prior to entering journalism, John worked in public relations for clients in financial services, investment management, fintech and cryptocurrency. John is currently receiving his M.A. in business and economic reporting from NYU as a Marjorie Deane fellow.

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