Headlines like: “Corona fills tech-giants coffers”, or “Tech giants hit all time high”, or “Apple, the first US Company to hit$2 trillion valuation”, have been part of our daily news for month. Yet, all face privacy issues, or under scrutiny because of anticompetitive practices, and many governments around the world try to curb or shut down their services altogether.
That sounds like serious problems. So what drives investors to pay more for each dollar tech companies expect to earn? Are any of the valuations justified?
The world’s most valuable company
It took Apple 42 years to reach $1 trillion in value. It took it just two more years to get to $2 trillion. On Wednesday August 18th 2021, Apple became the first U.S. company to hit a $2 Trillion valuation and became the most valuable public company in the world. Mid-March Apples value was under $1 Trillion after the stockmarket had plunged due to governments around the world mandating lockdowns.
Shortly after the Federal Reserve in the US and many other Central banks announced extensive measures to soften the economic blow the lockdown would cause. Since then not only Apples stocks soared, but all other tech stocks like Microsoft, Amazon, Alphabet and Facebook were quick to catch up. Together those five companies swelled by $3Trillion, nearly the same as the S&P 500 fifty most valuable companies combined. Those five companies now constitute more then 20 percent of the stock market’s total worth, a level not seen from a single industry in at least 70 years.
Flight to new heights
While the economy contracted and many companies struggled to survive, the biggest tech companies were amassing wealth and influence in ways unseen in decades. Investors were willing to pay more for each dollar tech companies were expected to earn.
“This crisis has strengthened what was already a strong hand.”
Aswath Damodaran, Finance Professor, NYU
American tech titans flew high before the coronavirus pandemic, making billions of dollars a year. The pandemic has lifted them to new heights. The industry is now in a position to dominate business around the world in a way unseen since the days of railroads.
Apple is the second publicly traded company to hit $2 trillion(August 2021). Saudi Aramco, Saudi Arabia’s state-owned oil company, went public in December 2019 and briefly exceeded the mark. It remained the world’s most valuable company until Apple surpassed it last month.
Dominance in our lives
The tech companies’ all time highs on the stock market is propelled by an unprecedented reach of Big Tech into our lives. They shape the way we work, communicate, shop and relax.
On a typical work-from-home day, a person might communicate with colleagues using Slack, attend videoconferences on Zoom, order takeout food via DoorDash and in the evening watch a movie on Netflix, said Jonathan Welburn, a lead author on the RAND study. All of them run their businesses on Amazon Web Services.
That has only deepened during the pandemic, and as people shop more frequently on Amazon, click on a Google or Facebook ad or pay up for an iPhone, the companies receive a greater share of spending in the economy and earn ever larger profits.
Analysts can’t keep up
Share prices have outpaced the predictions of even the most bullish sell-side analysts. Two-thirds of analysts have a “buy” or “outperform” rating on tech companies, and that includes Tesla, the Silicon Valley car company
Are the valuation justified? Although most tech companies´ recent financial results have been robust. Valuations measured by its price-to-projected-earnings ratio are at their highest in more than a decade.
Tech Giants wielded another powerful tool to boost their valuation and enrich its investors and executives: stock buybacks. Interest rates were low and borrowing cheap, the perfect time to repurchase. This reduces the number of shares for sale. Repurchasing stock generally increases a company’s share price.
Currently, investors are paying more for each dollar that a tech company expects to earn. They seem to believe either that the company could make even more money in the future or that any sort of earnings growth in this market is worth a premium.
The latter seems to be trending with investors, with tech giants benefiting from people’s increasingly digital lives, while most other sectors are struggling through the worst recession in generations.
Speed Read
– Big Tech Companies are the big winners of the pandemic
– Apple is the second publicly traded company to hit a $2 Trillion valuation
-Tech giants benefit from peoples increasingly digital lives
– Big Tech´s invincibility is attributed to an unstoppable “flywheel” effect
– Silicon Valley companies are considered financially resilient
– Tech companies are accused of using uncompetitive practices
– Tech giants are under scrutiny because of data safety issues
– Big Tech is accused of having too much power
– Extra money went into peoples pockets and needed to be invested
– Tech giant´s high stock market valuations are expect stay high in the future
Overrated Network effects
What platforms have in common is that their basic value proposition lies in the connections they enable, whether by encouraging innovation, facilitating transactions, or deepening relationships. Their imagined invincibility derives from a combination of unstoppable network effects and futuristic artificial intelligence.
The idea is that the internet has expanded the scope of these networks and the enormous quantities of data they generate feed new life into the “flywheel” effect. Meaning, every new user increases the value of the network to existing users. This feeds the tendency to exaggerate the role of network effects and A.I. and is the justification for outsize valuations.
Anticompetitive practices
Critics say the companies have grown in part because of a range of anticompetitive practices. Like Apple, many have a product or service line designed to lock customers into its ecosystem.
“Our products and services are very relevant to our customers’ lives and, in some cases, even more during the pandemic than ever before,”
Luca Maestri, CFO,Apple
Around the world, regulators are investigating whether Big Tech companies and their subsidiaries break competition rules. American regulators are looking at whether large tech firms committed antitrust abuses when acquiring other companies. Some antitrust scholars believe the rise of industry-dominating companies has led to stagnant wages and increased inequality. Antitrust subcommittees around the world want answers from tech chief executives. Some are already planning hefty fines for the big players in the tech industry.
Too much power
According to some competition experts, the concentration in the Tech industry is greater today than in the late 1800s, when the US Congress passed sweeping antitrust legislation to curb the power of the railroads.
There is no denying, to be a full-service cloud provider like Amazon, Microsoft and Google is an immensely expensive endeavour. Each spends an estimated $10 billion to $15 billion a year on its data centers and cloud networks. Only a handful of companies in the world can afford these sums.
“Our engineers are helping America remain a global leader in emerging technologies like artificial intelligence, self-driving cars and quantum computing,”
Sundar Pichai, CEO, Google LLC
Regulators fear that Big Tech´s ability to dictate terms, call the shots, upend entire sectors represent the powers only dictatorships have. It is possible that the global economy will emerge from this crisis even more concentrated and consolidated than before. Yet, more and more governments pledge to break up these giants and curb their economic and political power
The recently published Facebook Files gave a disturbing insight into Facebooks irresponsible way of making money. Ms Haugen not only detailed what the social media giant knows about the harms its platform is causing. But also how Facebook is misleading investors with public disclosures that did not match its internal actions. These eye-opening disclosures will not only raise eyebrows amongst governments and users around the world but, could be the start of Facebook´s breakup, and others could follow.
The Losers
As the virus has emptied out shops, airplanes and hotels, both large and small businesses have felt the economic pain. Many need financial support to survive, whether in the form of loans or new debt issuance. Many previously robust companies are on shaky ground and cash-hungry investors are unwilling to snap up outstanding corporate debt. With interest rates being low it is, for the majority of companies, too expensive to raise money by issuing new bonds.
It was not all gloom, the pandemic offered possibilities for new companies to make inroads. Zoom, the videoconferencing company, has ballooned during the pandemic, and its stock went up over 150 percent during the first lockdown, only to loose traction once the lockdowns were over.
Streaming companies like Netflix, Disney or HBO skyrocketed to all-time highs thanks to the COVID-19 pandemic. People all over the world were stuck at home with only technology to depend on for entertainment and streaming service subscriptions.
It remains to be seen, if these companies can sustain their growth, build similar solid financial bases, and will ever have the unrivalled ability to generate profit . The first signs are less rosy, since September 2021 subscriptions were stagnant and remained below any forecasts.
Government´s role
Central banks have pushed interest rates down to near zero. Market participants were convinced that rates will not rise in the foreseeable future. As a result, prices for long-lived assets have all been driven up. Because tech firms’ revenue streams are tilted far into the future, they benefited disproportionately from low interest rates.
“Covid was the perfect positive storm for these guys”
Thomas Philipon, Professor of Finance, NYU
Another important factor, is that many recipients of generous government aid, especially in America, did not experience a drop in income. So, with plenty of time at hand and extra money in their pockets a new type of investor entered the markets.
Investor psychology
It’s not exactly daring to invest in the biggest company in the market. But, it is unusual for the largest companies to generate the juiciest stock returns. Certainly a reason why investors flocked to those stocks-they made a lot of people very rich.
Silicon Valley’s giants are considered to be financially resilient. They have an unrivalled ability to generate profits, are flexible and above all digital. This made them seemingly pandemic- proof. They continued raking in billions of dollars amid the pandemic.
“The stock market has the great advantage that it’s looking at the stream of future profits, they think they are high today — and going to remain very high in the future.”
Thomas Philippon, Professor of Finance, NYU
Of course, the searing rally in these stocks could be the result of excessive optimism and the stocks could fall. But if the Tech Giants keep reporting huge profits, they will most likely still make up an outsize share of the overall market.
