For a moment, Jeff Bezos became the richest man in the world. As Amazon’s share price soared to its all-time high ahead of its second-quarter results, its founder and chief executive – who owns 17 per cent of the company – saw his personal wealth overtake that of Microsoft’s (MSFT) top dog Bill Gates. But by the time Mr Bezos had finished informing shareholders of another period of investment, which he thinks will slow profit growth, the share price of the e-commerce-cum-tech giant had fallen back.
Amazon wasn’t the only US juggernaut to suffer a share price fall in the wake of second-quarter results. Google’s parent company Alphabet (GOOGL) reported its worst year-on-year profit fall since the financial crisis, after it was hit by a €2.42bn fine from the European Commission last month.
In contrast, Facebook (FB) is flying. Concerns that advertising income might be hampered by competition from fellow social networker Snap (SNAP) were quashed, after the group reported a 47 per cent year-on-year increase in advertising revenue. Meanwhile, Netflix (NFLX) is hauling in customers. The demand for original content, entire box sets and Adam Sandler films sent membership numbers further past the 100m mark during the period. Although a period of Amazon-esque investment constrained profit growth, investors didn’t seem too bothered and the shares rose 8 per cent on the day of the results.
A 50:50 split in the share price fortunes of the FANG companies (Facebook, Amazon, Netflix and Google) following second-quarter results isn’t bad considering their stretched valuations. The US giants have been expensive for a while, recently pulling the value of the S&P 500 technology index through its dot.com bubble highs. According to data from Yale University’s Robert Shiller, the index is trading on a cyclically adjusted price-to-earnings ratio (CAPE) of 30 – the highest it has been since 2001.
These kind of statistics are making analysts jittery, but today’s tech behemoths are very different beasts from those companies that went pop at the turn of the millennium. Facebook, Amazon and Alphabet are more quality than growth stocks, rated positively on measures such as free-cash-flow margin and return on equity. Netflix scores well on these metrics, too, although with its robust sales expansion, quants at Societe Generale Cross Asset Research still consider it primarily to be a growth stock.
Last year's rotation into value investing has reversed and, while expensive, the tendency of the big tech companies to combine quality with growth characteristics could underpin high valuations a while longer. As the SG team highlight, growth stocks often do well in late-cycle economic regimes. In their research, quality growth stocks – such as the FANGs – with above average long-term earnings and sales growth, are attractively defensive.
That’s not to say these companies are without fault – there are many challenges that may yet be the undoing of their lofty valuations.
Microsoft is also having to invest more in its tech development and it was the group’s cloud computing division that propped up recent half-year numbers. At Apple (AAPL) it is becoming harder to get customers excited about the latest version of the iPhone. Business in China is still struggling and group operating margins fell to 24 per cent during the three months to June, its lowest in eight years. That said, acceleration in the app and cloud computing business ensured another period of revenue and profit growth.
Google has already faced the wrath of one regulator due to the dominance of its search engine, and both its Android mobile brand and advertising platform are also undergoing further European competition investigations. In the US, News Corp and other newspaper owners are lobbying the government for regulatory change in the advertising market and – judging by his tweets on the subject – President Donald Trump is listening.
Facebook, like Google, has benefited from demand for digital advertising, but management has warned for some time that its rate of growth would slow as it closes in on the peak number of advertisements it could show in its main app’s news feed. And then there is the heady spending at Amazon and Netflix, which may yet spook cost-conscious investors. Both sites boast enormous customer numbers but they remain two of the least profitable companies in the big US tech sector.
