Personal Investing
3 Nov 2017 01:28pm

Big Tech repaying investor faith

Any concerns that share prices in Big Tech are too stretched have been set aside for now, following a blockbuster round of earnings last week.
Caption: Last week saw forecast-beating results for Amazon, Microsoft and Alphabet

Amazon, Microsoft and Alphabet (parent of Google) all posted forecast-beating results, suggesting the companies can deliver on the relatively high valuations placed on them.

The numbers from last week included Amazon and Alphabet increasing their revenue by 34% and 24%, respectively, compared to a year ago. Microsoft managed a 13% increase. The companies beat expectations on all sorts of metrics and the overall effect was to push their share prices straight upwards.

Alphabet shares rose more than 4% on the day of its results, while Microsoft jumped 6.4%. The stand-out, however, was Amazon which added 13.2%.

The fortunes of this small group of companies is increasingly important to overall stock market levels. They dominate US stock indices and are therefore likely to feature high up in the holdings of any retail fund focused on the American, or indeed global, market.

There is much attention on the FANGs - that’s Facebook, Amazon, Netflix and Google - but Apple is more often than not often grouped in the same category. You can add Microsoft too, as well as those comparably huge players from Asia - Samsung, Alibaba and Tencent.

Optimism about these companies has driven stock markets higher this year at a time when other factors look far less certain. Political uncertainty has undermined confidence and the tremendous stimulus handed to markets from loose monetary policy may now have peaked, with central banks in the UK, US and Europe now on a tightening path.

The strong earnings offers hope that share prices can be supported despite the worsening picture elsewhere.

Another big test arrives on Thursday when Apple reports. The iPhone company is now the biggest in the world, yet strong revenue growth is still expected. The mid-point of the company’s own

expectations is for 7.7% year-on-year growth. The latest figures won’t indicate appetite for Apple’s latest handset, the iPhone X, which only launches in November.

Branching out

The next challenge for Big Tech is to demonstrate that it can successfully expand to new areas beyond its core markets.

For each company, the challenge is different. Amazon has shown it is able to disrupt traditional retailers but has its sight set on less obvious areas too. It is in the process of securing licences to distribute pharmaceuticals in several US states, for example, while it is making headway with its Amazon Echo, a voice-activated, internet-enabled speaker.

For Alphabet, the challenge is to grow its “other bets” business - the part doing exciting things with driverless cars, among other things. So far, this has been a tiny part of the business, dwarfed by the ad revenue machine that is the Google search engine. The results last week showed the division is still loss making, but parts of it are beginning to make sales - revenue reached £302m.

Apple offers devices beyond the iPhone, of course, and has plans for more. From a business point of view, however, it is in the service area that Apple can truly diversify. By selling apps, games, music and subscription services, Apple is building a revenue stream that is far less cyclical than that of iPhones and tablets.

If you believe the stellar run for US tech has a while to run yet, our Select 50 list of favourite funds has a number invested heavily in the sector.

Lazard US Equity Concentrated is a new addition to our Select 50 list of favourite funds and holds 31% of its money in US tech. Alphabet is an overweight position.

Rathbone Global Opportunities Fund, managed by James Thomson, invests across the world but with a substantial chunk (around 25%) dedicated to US technology via investments in companies like Amazon, Alphabet and Facebook. 

 Ed Monk, Fidelity Personal Investing 

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