Big Tech Doesn’t Mean Slam-Dunk Investing

May 4, 2021

Editor’s Note: We’ve covered Big Tech and its overreach extensively in American Consequences. Today, we’re sharing Digest writer Corey McLaughlin’s essay on how the giant tech companies are flush with cash these days and why you should be careful before buying in…

Big Tech Doesn’t Mean Slam-Dunk Investing

by Corey McLaughlin

Someone could easily write a daily newsletter on the “FAANG” stocks alone…

You could cover the good and the bad of the entire Big Tech sector… or simply focus on one of the monster individual FAANG companies – Facebook (FB), Apple (AAPL), Amazon (AMZN), Netflix (NFLX), or Alphabet/Google (GOOGL).

That’s because these companies touch more areas of life than most folks can imagine…

And it’s also why whispers of increased “regulation” of these companies are never far away. The idea has been in the air for years, yet it hasn’t materialized in a Standard Oil or AT&T sort of way. But we keep hearing the calls…

Most recently and significantly, Supreme Court Justice Clarence Thomas made his view loud and clear in a public opinion… Thomas said that companies like Amazon should be treated as public utilities – like telecom companies, for example.

Now, this is not a new argument…

But the whole “these are essential businesses and should be treated as such” part of the story was renewed amid the COVID-19 pandemic. Plus, the story also hit Thomas personally earlier this year…

In early February, Amazon pulled a documentary film about Thomas, which first aired on PBS, from its streaming service. And the documentary’s producers said it did so quietly, without giving any explanation.

Perhaps this isn’t a coincidence then… But about two months later, Thomas wrote in an opinion (on another case, where the Supreme Court said former President Donald Trump had the right to block people on Twitter)…

Today’s digital platforms provide avenues for historically unprecedented amounts of speech, including speech by government actors. Also unprecedented, however, is the concentrated control of so much speech in the hands of a few private parties…

Thomas went on to argue that the market share of these companies is too big today. He mentioned Amazon, Facebook (roughly 3 billion users), and Alphabet (90% of global Internet searchers) by name and said…

A person always could choose to avoid the toll bridge or train and instead swim the Charles River or hike the Oregon Trail, but in assessing whether a company exercises substantial market power, what matters is whether the alternatives are comparable. For many of today’s digital platforms, nothing is.

To this, we say the alternative is to just not use them. But he’s right… It is hard these days to quit Twitter, Facebook, or anything else related to the ubiquitous Internet platforms.

Behemoth Amazon

What would life be like without the company, which seemingly offers everything a person would want to buy and reliable delivery to boot?

It would be a lot different… The country nearly turned into the “United States of Amazon” when COVID-19 had folks crazed with lockdown cyber shopping.

In Jeff Bezos’ final letter to shareholders as Amazon CEO in April, he said the company added 50 million Prime subscribers worldwide since January 2020. In the U.S. alone, the number of Amazon Prime members is now nearly 150 million… That’s 45% of the entire U.S. population.

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And that’s also pretty close to the record number of people who voted in last November’s presidential election (roughly 159 million). In fact, “Amazon subscribers” would’ve easily won if the election were decided by the amount of the company’s paying customers versus the Electoral College or the popular vote.

This is all to say the drumbeats for regulation will probably continue… But we don’t see any immediate signs – in the U.S., at least – that there will be any serious, meaningful legislation that will break these companies into pieces in the near future.

Big Tech Raked In Tons of Cash So Far in 2021

This was a big takeaway from a round of quarterly earnings reports that came out this week…

With more people working from home, perhaps needing new or updated equipment and spending more time on their devices than they likely imagined, the revenues of companies like Apple, Alphabet, Facebook, and Microsoft (MSFT) were phenomenal – and record-setting, in some cases.

Apple reported record revenue of $89.6 billion (or roughly 10% of a small federal stimulus plan) for its fiscal 2021 second quarter, which ended in March. Roughly half of that ($47.9 billion) came from iPhone sales, particularly the company’s new 5G-capable phones. Apple also announced a $90 billion share-buyback program… and said that it would hike its dividend again.

CEO Tim Cook said Apple was able to avoid disruption from the global chip shortage, mainly because it started making its own new chips last year. But he acknowledged that the company might take a $3 billion to $4 billion hit this quarter from disruptions in its “legacy” semiconductors supply chain, which mainly relates to its iPads and Mac computers.

Alphabet reported record first-quarter revenue, too…

The Internet search and, well, everything giant made more than $55 billion, a 34% year-over-year increase, with strength across many of its business lines. As Stansberry Research’s NewsWire reported last week…

CFO Ruth Porat said the strong quarter reflected ‘elevated consumer activity online and broad-based growth in advertiser revenue.’ As we’ve noted in recent months, the pandemic has forced an acceleration in online services – in everything from shopping to advertising. That has been a tailwind for GOOGL’s business.

GOOGL’s cloud business continued to grow rapidly, as well. Google Cloud revenue was $4 billion in the quarter, up 46% from the same quarter a year ago. Like the advertising business, this area has also been boosted by the pandemic. With workers out of the office and working remotely, businesses needed to store all their data in the cloud.

In another part of the Alphabet story, we continue to be amazed by how great of a move its purchase of YouTube for $1.65 billion back in 2006 has proven to be…

Last quarter alone, YouTube brought in $6 billion in advertising revenue. That’s up 49% from a year ago. So as you can see, the deal long ago started paying for itself.

Like Apple, Alphabet announced a stock-buyback plan – for $50 billion in shares, or about 6.6% of its shares outstanding – boosting value for existing shareholders.

People are buying a lot more (expensive) Facebook ads as well…

Facebook generated more than $26 billion in revenue, beating the consensus expectations of Wall Street analysts. Its advertising business led the way…

CFO David Whener said FB’s strong earnings and revenue were fueled by a 30% year-over-year rise in the average price per advertisement. He also said a 12% increase in the number of advertisements that the company delivered played a major role as well.

That’s the good news for Facebook. Given its user size and network effect, the company is able to charge higher prices for ads, and it’s selling even more of them… Inflation hits the digital world, too, it seems.

Here’s a taste of regulation-related concern, though…

Daniel also reported that Facebook is worried about a new update in Apple’s recently launched iOS 14.5 mobile operating system, which will first ask users to “opt in” to having personal information, location data, and more collected… rather than the go-try-to-find-your-privacy-settings and “opt out” status quo.

We don’t know what the outcome of this change will be. But we suspect it won’t stop advertisers from spending money on Facebook ads, which are making cash for the company today.

And don’t forget the cloud…

That was the biggest boom for Microsoft, which brought in $41 billion in revenue last quarter. Revenue from its Azure cloud division grew 50% year over year, a pre-pandemic comparison.

This is all to say… from a cash-flow perspective – which is what we care about when evaluating companies – times might have never been better for Big Tech than they were in the first three months of 2021.

But on the other hand, the risk-reward balance for buying new shares of these stocks isn’t the best in the world right now…

Use Caution When Buying Big Tech Today

We’ve talked about “frothy” valuations for a while, and tech stocks are a shining example. A number of indicators can lead you to that conclusion.

Sure, shares of Amazon or Apple could still double from here. But they’re the longtime “knowns” to everyone who does a sniff of research. Plus they carry near-term risks…

Despite the Big Tech companies having record quarters, you might remember the shares of these companies sold off earlier this year… at the same time that Wall Street became worried about the Fed potentially easing up on its “easy money” policies in the face of inflation.

We’re still in a “Melt Up,” of course… And the Fed is promising to do its thing for another year. But there’s always a chance that the tide could turn earlier than people might think.

Inflation fears and reality could reach the point where the Fed switches its current course and hikes rates… or more likely, a new higher-tax policy becomes closer to a reality.

If either scenario were to happen, the Big Tech powers – though flush with cash – could be among the first stocks to sell off again… or rise less, at the very least.

Financial expert Dr. Steve Sjuggerud thinks you might be better off looking at smaller tech companies today…

We know this might sound counterintuitive given all the glowing reports we shared about Big Tech today… But that’s exactly the point.

A year ago, many folks believed the FAANGs would be doing well today given the “at home” tailwinds in play. They bought shares and pushed prices higher. But in recent months, these stocks haven’t surged nearly as much as some predicted…

In the late stages of a Melt Up – where the rich have already gotten richer and everyone is high on higher prices – it pays to look past the big names…

For example, dot-com-era darling Qualcomm (QCOM) – today known for making chips, ironically – was up more than 2,000% during the final 12 months of the Melt Up in the late 1990s.

However, most of those gains came early… The stock rose “only” about 230% in the final six months of the bull market.

In comparison, the biggest gains of five to 10 times were really made in some of the lesser-known names as investors hit peak euphoria. DISH Network (DISH), for example, went up more than 700% during the whole dot-com boom… and 500% of that gain came in the final eight months.

Of course, to make those gains, you want to be aware of the environment you’re in and sell before the “Melt Down” as well. Again using Qualcomm as an example, it crashed hard from its early 2000 high… and didn’t reach that level again until the past few years.

Fortunately, Steve has a plan for which stocks to own as this new phase of the Melt Up plays out…

Last week, Steve held an important Melt Up event. He discussed what’s next for this raging bull market and shared some specific predictions… Specifically, if past Melt Ups are any indication, it’s the little-known smaller tech stocks that can really take off in this phase of the bull market.

Stocks are swinging wildly – while still churning higher and higher. The words “bubble”… “mania”… and “frenzy” are all over the mainstream financial press.

Steve delivered the full story on what’s happening in the markets right now – what it means for the Melt Up, our country’s financial system, and most importantly, your money.

If you missed the event, don’t worry… American Consequences subscribers can watch a replay of the crucial event for free.

Read our latest issues of American Consequences by clicking here.

Love us? Hate us? Let us know how we’re doing at [email protected].

Regards,

Corey McLaughlin
Contributor, American Consequences
With Editorial Staff
May 4, 2021

The post Big Tech Doesn’t Mean Slam-Dunk Investing appeared first on American Consequences.

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Author: Andrew Mundson


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