No endless growth: Apple, Facebook, Google & Co: Investors should not misunderstand this myth about the tech giants | message
Shares in this article
Indices in this article
Company size does not determine growth
Other companies also have high margins
Regulatory authorities are increasingly grappling with tech corporations
Over the past few decades, a few tech companies have become real stock heavyweights. The most valuable listed company is the smartphone manufacturer Apple, which now has an unimaginably high market capitalization of 2.11 trillion US dollars. The industry colleagues Amazon, Facebook, Microsoft and Google are scratching the trillion mark with their stock market values or have long been above it.
It is a popular belief that companies that have come this far and control such large market shares can only continue to grow. This can also be seen if you look at the expert estimates of the technology sizes. Without exception, all FactSet analysts recommend buying them with a large majority. The most recent balance sheets for the first quarter of 2021 also seem to confirm this popular opinion. Ultimately, the tech groups all reported strong leaps in sales and profits – despite the ongoing corona crisis. But does this also mean that investors can continue to expect strong growth in the future?
The Gibrat Rule
Not when it comes to the book “Ingalits conomique” by economist Robert Gibrat from 1931. Among other things, Gibrat devoted himself to the question of how the company grows and why some companies grow more or faster than others. He found that company sizes follow a so-called “random walk”, that is, their growth rates are random. The so-called Gibrat rule says that the growth of a company does not depend on the size of the company.
Tech companies do not stand out with high margins
So if you as an investor assume that the big tech giants can only continue to grow, it is worth taking a look at the past. The technology groups Apple, Amazon and Co. are by no means pioneers when it comes to stock market capitalization. As Patrick Herger from the new Zrcher Zeitung argues, Apple would currently make up 5.3 percent of all US companies based on the stock market value. However, the media giant AT&T was able to claim a share of more than seven percent in the 1950s, compared to over six percent in the 1960s. From this point of view, Apple is nothing special. According to Herger, the tech companies do not really stand out in the S&P 500 with their margin strengths either. Microsoft, Facebook, Apple and Google would have achieved an operating margin between 37 and 23 percent last year, but the same would also apply to the 15 closest S&P 500 companies by market capitalization. Here the average margin would have been more than 30 percent.
Tech grades benefit from lower taxes
In addition, the margins are not only due to the growth of the company, but also take into account the fact that large corporations now have to pay much less taxes than they did 70 years ago. So the tech giants simply have more profits hanging over them. However, the sheer size of technology companies can also have a negative impact, as their market power means that regulators are increasingly targeting them. Because while the political wind in the last few decades has been blowing in the direction of the softening of the monopoly right, the climate is now different with the increasing importance of data and consumer protection.
The wind turns
For example, Australia was the first country in the world to pass a media law in March 2021 that obliges Internet platforms to pay for media content that is brought to their networks by users and advertising revenue. Facebook in particular had massively complained about the planned law in advance. So if there is one thing that could throw a stick between the two tech groups in the future, it is tough competition and tax rules.
The Chinese Amazon competitor Alibaba only recently experienced this painfully first hand. Jack Ma’s group was fined billions by the Chinese authorities for taking advantage of its dominant market position. The planned IPO of the Alibaba financial subsidiary Ant Financial also had to be postponed indefinitely due to rule changes by the Chinese authorities.
Investors in the tech giants who are convinced that the technology giants can only go further up should be aware of these factors and not be obscured by myths about possible weaknesses.
Finanzen.net editorial team
More news about Amazon
Image Sources: Sundry Photography / Shutterstock.com, Brendan Howard / Shutterstock.com