US Reporting Season - Technology
The current reporting season has reinforced the standing of United States big technology companies as key drivers of growth for the foreseeable future. The strong performance of Apple, Amazon, Google and Facebook reinforces why they form a major component of the Lawrance Private Wealth investment portfolio.
In second-quarter reporting:
Apple reported a record revenue of US$81bn, up 36% over last year. Profit doubled to US$21.7bn, on the back of iPhones sales and their growing services division (up 33%).
Microsoft reported revenue of US$46bn, an increase in revenue of 21%, and net income of US$16.5bn, up 47%. The excellent result was primarily due to cloud services provided through Azure.
Facebook reported second-quarter revenue of US$29 billion, up 56% primarily due to increased advertising revenue. Net income of US$10.4bn, up 31%.
Google parent company Alphabet reported revenue was US$61.9bn, on the back of increased advertising revenue and increased cloud services revenue.
The upshot of these results is that big tech has emerged from the pandemic stronger than ever.
There have been calls to reign in the power of these companies through antitrust laws. Antitrust laws are designed to protect the process of competition for the benefit of consumers. Critics point out that approximately 50% or more of U.S. e-commerce sales goes through Amazon.com, 99% of mobile devices in the U.S. and globally run on Apple’s iOS or Google’s Android systems, about 89% of all general search queries in the U.S. is captured by Google, and as of December 2019, Facebook’s reached 74% of U.S. smartphone users.
These companies control vast amounts of data and also have the ability to buy out any competition or buy emerging technology. However, it remains debatable that just because these companies are big, they are anti-competitive or abuse their size. Such a claim has to be tested in court on a case by case basis. The last successful antitrust action was twenty years ago against Microsoft, while action against Google and Facebook in the final months of the last administration were unsuccessful.
Currently, Congress is considering reforms to antitrust legislation in the United States to reign in their power. The key proposal is that businesses would have to split their product from their platform (i.e. Apple couldn’t offer Apply Music). If some of these companies were forced to change their structures, we do not believe that this will substantially change their earning capacity and even create other opportunities.
The Lawrance Private Wealth portfolio has a heavy weighting to US technology stocks for the simple reason that they have continuously produced strong earnings growth year after year.This growth reflects the long term secular trend of the growth of IT products and services, cloud services, AI, machine learning, virtual technology, e-commerce and automation – the core business of these companies. Barring any major reforms to the operating environment for these companies (and possibly even with major reform), there appears to be few threats to the revenue generation capacity of these technology sectors for the foreseeable future.
