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This morning, we are rolling out our “Year In Review” series. These posts will cover popular industries and wrap up all of the important information from 2021 and give an outlook for the industry and major players going into 2022. A special thanks to our new Cents Coverage Analysts who helped the Cents team put these write-ups together!

Today’s post on Big Tech (FAAMG) was put together by our Cents Coverage Analyst, Peter E, who has been covering these companies in the ROIC portal.

Morning Cents: For news and analysis covering macro, crypto, and business topics sign-up for our FREE daily newsletter Morning Cents!


Introduction

The “Big Tech” firms comprise five of the largest technology-based companies in the world. Also referred to as “Tech Giants,” these companies are well regarded for the technology they have developed that most humans use in some way, shape, or form. The “Big Five” of “Big Tech” are commonly known as:

  1. Alphabet / Google ($GOOG, $GOOGL)
  2. Amazon ($AMZN)
  3. Apple ($AAPL)
  4. Meta Platforms / Facebook ($FB, will soon be $MVRS)
  5. Microsoft ($MSFT)

These companies are dominant leaders in e-commerce, online advertising, consumer electronics, cloud computing, computer software, media streaming, artificial intelligence, smart home, and social networking.


YTD Performance (as of 12/20/2021)

Collectively, investing in Big Tech during 2021 has yielded fantastic returns. Despite the volatility this year, even the worst performer (Amazon) would have generated at least 5% return YTD. The best performer of Big Tech in 2021 is Google followed by Microsoft.

  1. $GOOG = 65%
  2. $MSFT = 47%
  3. $AAPL = 31%
  4. $FB/$MVRS = 21%
  5. $AMZN = 5%

Big Tech News in 2021 – A Recap

Google


Amazon


Apple


Meta Platforms (Facebook)


Microsoft


Industry Comps


2022 Outlook

Big Tech Industry (All Companies)

  • We will continue to monitor major antitrust and legislation issues that pertain to all Big Tech companies. Some firms are at higher risk than others and deserves strategic portfolio management mitigation.
  • In November 2021, U.S. Senate confirmed the appointment of Jonathan Kanter to head Justice Department’s Antitrust Division. He is a known Google critic and poses potential conflicts of interest. He is encouraged to impose tougher regulations against Big Tech companies such as Meta Platforms, Amazon, Apple, and Google.

Google

  • Average analyst “fair valuation” believes that Google should be trading ~$3,500 per share. Primary drivers of this valuation include continued global expansion of search advertising spending, mobile search advertising becoming more prominent, and continued growth in monetization of YouTube services.
  • Following in Apple’s footsteps with the launch of Google’s proprietary Tensor chip along with a strategic pricing strategy of new Pixel phones, the reception of this technology has been well received and these phones are now the most highly recommended Flagship Android Phone in the market. We are excited to see what Google will do to build upon expansion of Tensor as well as improvements for Pixel phones.
  • Launching of Waymo’s Robo-Taxi service in 2021 and further expansion could provide a diversified profit strategy, but most likely will be beyond 2022 outlook (perhaps 2025 or beyond).
  • More variants to Covid-19 poses risk to ad revenues that may lead to stagnant ad spending growth.

Amazon

  • Despite Amazon continuing to consolidate within the $3,000 to $3,700 this year, analysts reiterate an average fair valuation of ~$4,000.
  • Amazon’s high margin businesses continue to drive profits without slowing reinvest growth. Although it appears that Amazon may have had a sleepy year in 2021, the company continued to build its last mile delivery service, warehouse fulfillment service, Amazon Prime service, expanded Amazon Fresh stores, bolstered Digital Content for Prime Members, continued developed of Alexa/Echo devices, while maintaining healthy AWS margins.
  • We are, however, monitoring inflection and potential deceleration of AWS margins as intrinsic reduction in growth is inevitable.
  • Additionally, we believe that Amazon’s second smallest business component (Ad Business), has the high potential for growth expansion along with diversified profitability.

Apple

  • With a street high price target of $210, analysts have high expectations for Apple in 2022. Most notably, bullishness leverages upon Apple’s potential to expand Augmented Reality/Virtual Reality (AR/VR) technology.
  • We are especially bullish on further development and expansion of Apple’s proprietary M1 chip and what impact this technology may have in the industry.
  • Chip shortages will continue to plague iPhone manufacturing (among other products in their service line) that is expected to last beyond first (or second) quarter of 2022.
  • Macroeconomic events may also impact global consumer spending, thus having the potential to weaken sales.
  • We will continue to monitor increased regulation with Apple’s App Store. We are especially cautious about further regulation being imposed that allow App developers to redirect payments away from Apple.

Meta Platforms (Facebook)

  • The major theme we are obviously monitoring is the success of “The Metaverse” and how the transition of Facebook into Meta Platforms will impact the company moving forward.
  • With an initial investment of $10 billion into metaverse in 2021 and is currently projecting initial estimates of investing up to $50 billion throughout the next several years, we are concerned that this capital expenditure may lead to an unfruitful venture that may hurt investors in the short term.
  • We do believe that Instagram monetization (as well as other social media platforms owned by Meta) will continue to sustain Meta with relatively similar Ad Revenue growth.
  • On a positive note, the collaboration with Ray-Ban to develop Ray-Ban Stories (cameras embedded with Ray-Ban frames that integrate with Meta’s social media platforms) were positive hit with tech enthusiast and showcases how innovative the company can be. We expect further innovation in 2022.
  • Other concerns to note with Meta, is continued negative press regarding privacy and data along with safety regulation for minors on Meta’s social media platforms (pertaining to adult content).

Microsoft

  • Microsoft has significantly outperformed its Big Tech peers in 2021 (except for Google) and we suspect it will continue to utilize its current momentum to keep growing its public cloud adoption services with Azure.
  • We are especially impressed the company’s durability even throughout the pandemic sustaining double-digit revenue growth (mainly from Azure expansion, O365 ARPU growth, and LinkedIn profitability).
  • Cloud adoption continues to be key. Microsoft is supported by operational efficiency (which has the potential to optimize economies of scale through centralization of acquisitions).
  • However, note that margin expansion could be impacted with further investments into acquisitions. As we can see in 2021, Microsoft made several relatively low-key acquisitions (other than Nuance which was the most prominent). We will continue to monitor this risk to downside.
  • Despite trading at a premium, Microsoft is a rare breed of growth, defensible, stable, and set and forget capital compounder that can weather virtually any financial storm.
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