Magical reality is the fuel that powers valuations in tech.
Less than two years after Apple (AAPL) became the first public company to hit a trillion-dollar market capitalisation, it topped $1.6tn. Neither sales nor profits have matched the pace of share price growth. Yet a $2tn market cap does not look out of reach. The first milestone took almost four decades. The second is likely to be a lot speedier.
Between them, Apple, Amazon (AMZN) and Microsoft (MSFT) have added more than a trillion dollars in market value since the start of 2020. Regulators already concerned about the influence of tech mega-companies must surely be looking askance at the stock market bonanza.
What could derail the rally? Two things: continuing economic recession and more forceful antitrust regulation.
Both factors have been at play this week. Microsoft shares dipped in spite of forecast-beating sales after the company reminded investors of the economic drag from the pandemic. Growth in cloud computing, which gives users access to computing power from company servers, failed to match lofty expectations.
Intel (INTC) also reported stronger than expected quarterly earnings, yet shares tumbled when it declared it would delay the launch of its next generation of chips. Meanwhile, reports that Apple faces consumer protection investigations in multiple US states knocked the iPhone maker’s shares.
Given the importance of tech to US equity markets, it is worth paying attention to the number of caveats offered by tech companies that reported otherwise boastworthy results.
Netflix (NFLX), now practically a utility for millions stuck at home, added 10m new users in the last quarter. Yet it warned that subscriber growth in the next quarter is likely to fall to 2.5m. Vanishing chat app Snapchat (SNAP) added 35m users compared with last year, as teens sequestered with their parents sought out more virtual contact with their friends. But parent company Snap cautioned that demand had already fallen back from a pandemic peak and that it no longer expected to be profitable this year.
Even bombastic electric carmaker Tesla (TSLA), which reported its fourth quarter of consecutive profits, had to acknowledge the effects that tax credit revenue had. Tesla’s share price is flat on the week.
To some, this pause is valid.
“There is a feeling of QE irrationality all over again,” wrote one investor when I asked how he felt about the pandemic-era market rally and the performance of recent listings such as insurance tech start-up Lemonade (LMND) and ZoomInfo (ZI). With governments, including the UK and US, buying up ultra-low-risk sovereign bonds in order to give a boost to markets and hopefully stabilise their economies, the money has gone elsewhere.
Even Airbnb, whose initial public offering was blown off course by the pandemic and which opted to borrow more money while still a private company, appears to be back on track with its plans.
The indecent haste with which $1tn companies Apple, Microsoft and Amazon became $1.5tn-plus companies lifted the wider tech sector. It also encouraged carelessness. For a brief period after last year’s WeWork farce, it seemed as though every tech start-up nearing a listing had to be profitable or have a bulletproof plan on how to get there. In the heat of the rally, gross margins were suddenly dropped as a talking point.
Now margins and moderation are back in focus. Four of the most powerful chief executives in big tech — Amazon’s Jeff Bezos, Facebook’s (FB) Mark Zuckerberg, Apple’s Tim Cook and Alphabet’s (GOOG) Sundar Pichai — are due to appear in front of a House committee and can expect questions designed to make them squirm.
The race to $2tn is still on. But after months of excess it appears that a minor reality check is under way.
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