Big Tech has had a tremendous run since over the last years against the US broader market. The developed markets outside of the US, especially Europe, have been left behind partly due to the relatively low weight of technology stocks in the market. Apple, Microsoft, Amazon, Facebook and the parent company of Google, Alphabet represent 22% of the S&P 500, an unseen concentration on 5 companies. The winner takes it all argument where Big Tech is ruling the world and dominates in terms of market share has been an overwhelming bullish argument for investors. The Covid-19 pandemic has accelerated this move: The share price of Apple for example is up 54% since the beginning of the year. This compares to Royal Dutch Shell losing 58% of its market cap over the same period. Apple trades at 35 times trailing 12 months earnings while Royal Dutch trades at 9 times. Gross dividend yield of Apple is 0.71% comparing to 5% for Royal Dutch. You will probably argue that we are comparing the incomparable: a technology and marketing superstar to a falling knife in a dying fossil industry. We would argue that 1/ every asset has a price and 2/ this price is ultimately based on the cash flows the business is generating and by how much these cash flows are growing.
According to Bloomberg consensus, EPS of Apple will grow at 9.5% annually over the next 5 years after having grown 8.7% in 2020. For Royal Dutch, analysts are pessimistic: they have haircut their EPS estimates by 66% for 2020. It will take till 2022 for earnings to recover to the pre-pandemic level.
Apple is seen and valued as a compounding machine that keeps on compounding. So, the real question is what could stop the compounding?
One threat we are seeing is political. This week a US House Panel issued a 450-page antitrust report on Big Tech. In this report, the authors expose in detail the dominance of some technology players and the threat this could pose to the US consumer. In market share for mobile operating systems, Apple is unsurprisingly the uncontested leader with more than 50% market share (left graph). In the same way, Google dominates the Internet Search market (right graph).
We expect of the Democrats would lead to more discussions on Big Tech and more pressure to legislate in order to reduce the dominance of these players. This is not priced in and could harm their future earning power.
Will Washington become a Big Shrek for Big Tech?