What's Next For The Largest Tech Drivers Of 2020
Amazon (AMZN) and Apple (AAPL) have been provided with the pandemic's strong tech tailwind, and they are coming out of this economic chaos more valuable than ever. The world is digitalizing rapidly, and you can see the value of this technology explosion in the hottest tech stocks.
Amazon's market cap surged by $805 billion, while Apple increased its value by $871 billion in 2020, making these two stocks the largest S&P 500 drivers this year. Whether these stocks deserved this massive valuation push is something I will dive assess below.
Both of these tech giants had history-making events this week. Amazon had its delayed 2020 Prime Day (October 13th and 14th) kicking the holiday season off early, while Apple unveiled its highly anticipated 5G smartphone.
Prime Day Effect
Amazon's shares experienced the same Prime Day Effect that it has for the past 5 years. AMZN shares surged over 10% in the two weeks leading up to the 2-day event, which began today. This is becoming a price action tradition that traders can take advantage of. Whether it's a self-fulfilling prophecy or just a coincidence remains to be seen, but its workout almost precisely as I predicted in my recent article: The Prime Day Effect: Will Amazon Deliver Returns?
This 48-hour shopping frenzy is estimated to bring in $9.9 billion, according to eMarketer. A more conservative analyst from JP Morgan estimated $7.5 billion in sales from this history-making event. Either way, this is expected to blow any prior Prime Day out of the water.
Amazon has unquestionably changed the world with both its go-to e-commerce platform and its cloud behemoth, AWS. This stock was one of the largest benefactors of the devastating pandemic. The pandemic marked a climax in the "retail apocalypse," sending many brick-and-mortar retailers to their death, and forcing customers to rely on e-commerce more than ever, which is a word becoming synonymous with Amazon. The work, learn, and function from the home economy we find ourselves gave AWS a good boost.
I like Amazon at any price below $3,500 for a long-term investment, as long as you can stomach potential short-term volatility.
Apple iPhone Release
Apple's much anticipated 5G iPhone release yesterday didn't blow anyone out of the water as the company released its usual iPhone line-up, with 4 options this time. Apple also unveiled a new state-of-the-art speaker called the home pod mini. This $99 smart-speaker is going to be a massive competitor to Amazon's echo line-up, still not a massive moneymaker.
The new 5G iPhone 12 will have a few modifications (outside of 5G connectivity) including flatten-edges, higher resolutions, faster processor (11.8 billion transistor chip or 40% more transistors than its predecessor), 4x tougher glass screen, increased waterproof feature for some models, better cameras and larger screen displays. This has been the iPhone release recipe for years and no one was surprised by the new functionality.
Despite being relatively unimpressed by the new features, I will still likely purchase one of these new smartphones because my phone is due for an upgrade. Tens of millions of others are anticipated to do the same, but will it be enough to drive Apple back into a healthy growth period? I don't believe it will be a sustainable one.
Sustainable growth today in the tech sector is driven primarily by subscription-based offerings, which has become the golden standard in tech today. Apple has attempted to release some subscription services, which include Apple Music, Apple TV+, Apple, and the iCloud. These services have not gained the traction that analysts anticipated, with relatively slow growth figures and still making up less than 20% of sales.
The new iPhone 12 may be a short-term sales booster, but the lack of disruptive innovation in this landmark smartphone release gives me concern about its market share control in the smartphone space. The smartphone segment has been losing steam in recent years as the annual upgrades have become increasingly marginal. The cyclicality of this hardware giant is also cause for concern regarding financial visibility.
AAPL has more than doubled in the past 52-weeks. At the same time, its 12-month and 1 year forward price-to-earnings multiples have grown by over 70%, which means that the company is growing primarily on a valuation push instead of estimated performance advancements. I know the low-interest-rate environment justifies some of this valuation push, but I am skeptical about this enterprise's future growth.
I think Apple has hit maturity and doesn't have an enormous amount of upside from where it is trading today. Still, this cash-rich company has plenty of capital to spend on innovation-driven endeavors, which could flip the switch on growth for the most valuable company in the world.
AMZN and AAPL have been the biggest drivers of 2020's stock market explosive rally from its March lows, but their remains a large amount of uncertainty in both stocks’ lofty valuations. Can Amazon maintain its control of the e-commerce market as well as the cloud computing segment? Will 5G be able to resurge Apple’s iPhone business back into robust growth and can the company sizably expand its subscription-based offerings?
These are the question you need to be asking yourselves when you are analyzing Q3 earning releases this month. Amazon is expected to report next Thursday, October 22nd, while Apple will release its quarterly report the following Thursday, October 29th.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.