While similarities exist between the 1999/2000 Dot-com bubble and the mania that transpired over the last two years, one key difference is that the biggest tech companies weren't bid up to truly nosebleed multiples this time around.
And following recent declines, there really isn't anything bubble-like about the big-5 tech giants -- Alphabet (GOOGL) , Amazon.com (AMZN) , Apple (AAPL) , Meta Platforms (FB) and Microsoft (MSFT) -- right now. Arguably, valuations for the companies range from very cheap to just slightly expensive.
For those willing to contend with macro/geopolitical risks, here's an overview of where the tech giants stand in terms of valuation, growth drivers and risks. As always, investors are advised to do their own research before taking positions in any company mentioned (also, as mentioned a couple weeks ago, I think this is still a good time to stay hedged, as cheap and expensive stocks alike get dragged lower on down days).
Valuation: Alphabet respectively trades for 23 and 19 times its 2022 and 2023 GAAP EPS estimates. And those multiples would be lower if not for the losses produced by Alphabet's Other Bets and Google Cloud segments, which in 2021 depressed Alphabet's operating profit by 11%.
Things to Like: Between its incredible profitability, steady growth and near-monopoly position, Google Search remains one of the finest businesses on the planet. YouTube, which also has a near-monopoly position and benefits from video ad spend shifting to online channels, looks pretty good as well. The Google Cloud Platform (GCP) continues taking share, thanks in part to its differentiated services, and could be an important bottom-line contributor in a few years. Some other businesses, such as Waymo (part of Other Bets), hardware sales and Google Maps ads, also provide optionality. AI/machine learning investments remain a competitive strength for many Alphabet businesses. The company is now aggressively buying back stock and showing more financial discipline.
Risks: Antitrust risk exists -- even moderate changes imposed on Google Search by regulators could potentially have a meaningful impact on its revenue/profits. Following increases in recent years, there might not be a lot of room left to boost Search or YouTube's ad load. If Google Search was to lose its giant Safari integration deal with Apple, it would hurt Alphabet's bottom line and potentially let a rival become more competitive.
Conclusion: Alphabet remains a blue-chip, and not a particularly expensive one either. Though probably not a high-upside play at current levels, the risk/reward doesn't look bad.
Valuation: Amazon can't really be valued based on P/E right now, since its profits are depressed by enormous fulfillment, delivery and data center investments. But a good case can be made that AWS, which has a 2023 consensus revenue estimate of $105 billion, now single-handedly justifies more than half of Amazon's $1.5 trillion market cap. And that in turn would leave the rest of Amazon's businesses valued at less than 1.5 times their expected 2023 sales.
Things to Like: Amazon Prime and the company's fulfillment/delivery infrastructure are for all intents irreplicable. Together with the network effects of Amazon's massive seller marketplace, these assets leave Amazon well positioned to keep taking share in an e-commerce market that itself should keep taking share from physical retail over the long-term. AWS (still seeing 30%-plus growth) has a large moat of its own, thanks to its unmatched scale, feature set and software/services ecosystem. A steady mix shift towards services revenue streams should keep driving margin expansion. There's still a lot of headroom to expand in fields such as online advertising and grocery delivery, as well as to grow the company's footprint in some large international markets. Amazon is buying back stock for the first time in 10 years.
Risks: Reopening activity is pressuring e-commerce sales in the U.S. and elsewhere, and will likely continue doing so in the coming months. Energy/commodity and wage inflation remain near-term profit headwinds. Though still chairman, Jeff Bezos is no longer CEO, and it remains to be seen just how well Andy Jassy (formerly AWS' CEO) fills his shoes. Regulators are actively probing both the e-commerce operations and AWS, though it's not a given that they'll push for truly major changes to how the businesses are run.
Conclusion: Even after the jump seen following Wednesday afternoon's buyback/stock-split announcement, this might still be my favorite play among the tech giants. The stock is cheap, the moats look as formidable as ever, and long-term growth and margin-expansion drivers are still very much in place. While short-term pressures exist, the shares have arguably been excessively punished for them -- particularly in light of Amazon's better-than-feared Q4 report.
Valuation: Apple trades for 27 times its fiscal 2022 (ends in Sep. 2022) GAAP EPS consensus estimate, and 25 times its fiscal 2023 EPS consensus.
Things to Like: With the help of a giant ecosystem, strong customer loyalty and best-in-class hardware/chip engineering, the iPhone, iPad and Mac all remain share-gainers. The Apple Watch and AirPods continue seeing healthy growth, as do various services businesses. Rumored future products -- most notably foldable phones, AR/VR headsets and self-driving electric cars -- provide optionality. Large buybacks continue like clockwork.
Risks: High-end smartphone demand (currently strong) might cool off in late 2022 or 2023 as the 5G upgrade cycle winds down. The pandemic's end could weigh on near-term tablet and notebook demand among consumers. App Store transaction fees might eventually come down due to regulatory pressure in the U.S. and elsewhere.
Conclusion: Apple's stock looks somewhat expensive, but not insanely so given the company's customer loyalty, new-product optionality and time-tested ability to cross-sell products/services to its steadily-growing user base. I prefer waiting for a better entry point here, given some of the aforementioned 2022/2023 demand risks, but the stock is likely to keep doing well over the long run.
Valuation: Meta respectively trades for 16 and 14 times its 2022 and 2023 GAAP EPS consensus estimates. Moreover, with Meta's 2021 operating income depressed by 18% thanks to the losses incurred by its Reality Labs segment, those multiples would be lower still if not for Meta's VR/AR efforts.
Things to Like: The enormous network effects generated by Facebook, Instagram, Messenger and WhatsApp, which collectively now have over 2.8 billion daily active users. The online ad market's secular growth. A management team that's proved its mettle over the years, both when it comes to driving user growth/engagement and creating an advertising juggernaut. The optionality provided by Messenger, WhatsApp and Reality Labs, which for now aren't major revenue contributors. A debt-free balance sheet and large stock buybacks.
Risks: Apple's user-tracking policy changes are stinging Meta's ad sales, and though Meta's countermeasures (i.e., driving more transactions on its own apps, using AI to improve ad targeting/measurement) should soften the blow, it remains to be seen just how much they do so. TikTok and to an extent Snapchat are weighing on user growth/engagement, particularly among younger consumers (in response, Meta is overhauling its apps to drive more short-form video consumption). The long-term payoff for Meta's Reality Labs spending remains a question mark. The company remains the preferred social-media whipping boy of many journalists/politicians, which guarantees it will be the subject of fresh controversies (deserved or not) in the coming months/years. Bad publicity and a depressed stock price could weigh on employee hiring/retention.
Conclusion: Meta is dirt-cheap -- it's either the cheapest of the tech giants or a close second behind Amazon -- but is also perhaps the tech giant that carries the most business risk. The stock is worth a look at current levels, but it might be best to stay cautious about position size, at least until there's more clarity about the success of Meta's efforts to contend with some of its near-term headwinds.
Valuation: Microsoft trades for 31 times its fiscal 2022 (ends June 2022) EPS consensus estimate, and for 27 times its fiscal 2023 EPS consensus.
Things to Like: When it comes to selling software and cloud services to businesses, Microsoft remains a well-oiled machine. Its age-old Windows and Office franchises are still seeing meaningful growth, and Azure remains a share-gainer in a booming public cloud services market. Some other businesses that don't get as much attention, such as LinkedIn, security software/services and the Dynamics and Power Apps business-app franchises, have also become growth drivers. In gaming, Microsoft looks poised to be the leader in a burgeoning game-subscription market thanks to both large organic investments and M&A. Financial execution has been rock-solid, with operating margins steadily expanding and large buybacks boosting EPS growth. In recent years, Microsoft has enjoyed a green light to make large acquisitions of a kind that other tech giants are gun-shy about trying to get past regulators.
Risks: Arguably, many of Microsoft's products/services aren't truly best-in-class -- as a result, they depend heavily on Microsoft's ecosystems, bundling efforts and enormous go-to-market reach to win over businesses and consumers. Some Microsoft franchises that did well during the pandemic, such as Xbox, Windows and Surface, could be pressured a bit by normalizing consumer behavior. Microsoft's $68.7 billion deal to buy Activision Blizzard (ATVI) might just yield the kind of regulatory scrutiny the company has successfully avoided for about two decades.
Conclusion: Business-wise, Microsoft might have the lowest risk profile of any of the tech giants. Barring a recession, there's every reason to think the company will keep posting double-digit annual EPS growth over the next several years. But markets are well-aware of this, and have granted Microsoft a somewhat rich valuation. Much like Apple, it might be better to wait for a better entry point, though patient long-term investors will probably do fine.