The race has been on for some months to see which company can first reach a market value of $1 trillion. Apple was in the lead for most of the time, with Amazon and Alphabet in contention. Yesterday Apple hit the newsworthy level. It was a fitting achievement for a company that has come to define the smart phone revolution. Gone are the days when the Index was dominated by huge oil companies, or driven on by large industrial conglomerates such as GE in the US and GEC in the UK. Today the US technology companies stride the world markets with their fast growth in revenues and cashflows. In China their mirror competitors, Tencent and Alibaba, hold similar sway in their local share market. The US FANG companies (Facebook, Amazon, Netflix and Google) can still bare their teeth and take lumps out of conventional businesses.
Technology has propelled this slow and reluctant bull market to new highs over many months. Investors have come to like the ability of the technology companies to identify new wants and meet new demands, as people adapt their lifestyles to the abilities of smart phones, tablets and desktop computers. The technology is changing many business models. Some now want to get access to their favourite music and films when they want it on their mobile device, rather than watching on conventional TV or listening to a tape or disc. People want to shop from home and enjoy seeing the whole range and prices at the click of mouse or the tap of a finger. Agents find the internet matches buyers and sellers and provides a digital window for everything from new homes to new jobs better than the old techniques of shops and phones. People are spending more and more of their time reading, watching, interacting with their tech devices. As they do so the companies that provide the services reward themselves by dominating advertising, and the device providers experience great growth in output if they get the product right.
FANGs as a whole are still making remarkable progress
In recent weeks there have been the first signs that some of the mighty technology companies face some difficulties as they get larger. Google-owner Alphabet grew profits well along with revenues, but ended up paying large fines to the EU which meant profits in practice fell. Netflix produced figures for user growth which fell short of its expectations, disappointing investors as a result. Facebook has incurred costs and reputational damage as it seeks to find a new model to regulate the undesirable content some put on its pages. Apple has been downgraded as judged by the share price compared to earnings, as people fear they cannot sustain the rapid growth rates from the days when the iPhone was a phenomenon that many wanted to buy. To date, Apple has impressed by delivering strong growth in profits and cashflows, and found other business areas to help sustain progress.
How far can all this go before adverse reactions set in? The bulls point out there are many more markets to conquer with new technology, and still many people who do not yet use the social media and business services of the internet giants. These companies have global reach and can hope to increase revenues in the emerging world as people there get richer. Meanwhile, there are still business areas to take on in the advanced economies. The bears point to the inevitable slowing of growth rates as the companies expand. They worry that governments will one day find ways to tax them more heavily and constrain them more tightly by regulation. The EU may fine them more for practices they do not like, and use their data regulation to limit some of their business activities. They see the danger that just as the modern titans got big by taking markets away from others, so they in turn could be challenged soon by new companies with better ways of wooing the customers.
For the time being, the FANGs as a whole are still making remarkable progress. Their revenues are growing quickly, and in many cases now more of the revenue is dropping down to the profit line. Most of them are generating a lot of cash, which gives them plenty of options to expand and to reward shareholders more. The bull market seems to rest on their continued success. One day they will be superseded. One day governments may impose on them too far. Even allowing for the Facebook wobble and the fines on Google, we can expect more gains as others of them power on to become $1 trillion companies. Apple may have won this race, but the others will want to create records of their own.
The above article was previously published by Charles Stanley on 3rd August 2018