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.
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:
- Alphabet / Google ($GOOG, $GOOGL)
- Amazon ($AMZN)
- Apple ($AAPL)
- Meta Platforms / Facebook ($FB, will soon be $MVRS)
- Microsoft ($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.
- $GOOG = 65%
- $MSFT = 47%
- $AAPL = 31%
- $FB/$MVRS = 21%
- $AMZN = 5%
Big Tech News in 2021 – A Recap
- Google completes acquisition of Fitbit.
- Google secures Ford Motors Cloud Partnership which includes license fees for every Ford and Lincoln car sold starting in 2023.
- Google to lower service fees it collects from App developers from 30% to 15% on first $1 million developers earn.
- Google bundles products to land Univision Cloud Deal. Spanish-language broadcaster says Google won by including YouTube, search services in bid.
- Google wins cloud deal from SpaceX for Starlink internet connectivity.
- Alphabet’s (Google) Waymo launches Robo-Taxi service in San Francisco.
- Google’s new Tensor Chip is the heart of new Pixel Phones.
- Google and Roku reach multi-year deal to keep YouTube and YouTube TV on Roku’s streaming service.
- Amazon confirms agreement to acquire podcast publisher “Wondery” to be integrated into Amazon Music.
- Amazon incoming CEO Andy Jassy is committed to expanding video game services.
- Amazon acquires Shopify competitor “Selz”. A company that helps small businesses build online stores.
- Amazon Prime Video to be exclusive “TNF” (Thursday Night Football) home starting in 2022. Includes a 10-year agreement for 15 games and 1 pre-season game.
- Amazon opened 11 Amazon Fresh stores in US and plan to open another 28.
- Amazon and YES Network agree on partnership to stream 21 New York Yankees baseball games on Amazon Prime Video in 2021.
- Amazon backed food delivery service “Deliveroo” tanks in London market debut.
- Amazon to raise wages, an increase of an additional $0.50 – $3 per hour, for up to 500,000 workers.
- Amazon’s ad-supported streaming content has now reached more than 120 million viewers per month.
- Amazon boosts Asia-Pacific Reach with new AWS region.
- Apple filed patents that suggest the company is developing augmented reality headsets and smart glasses.
- Apple Music announces Spatial Audio with Dolby Atmos; will bring Lossless Audio to entire catalog.
- Apple developers grow App Store ecosystem billings and sales by 24% in 2020.
- Apple acquires classical music streaming service “Primephonic” to be included in Apple Music.
- Apple to spend $500 million to expand Apple TV+ marketing and increase output of new shows and movies.
- Apple vs. Epic Games (Fortnight), resulting in Apple allowing developers to send their users to other payment systems. Ruling does not find Apple as an antitrust monopolist.
- Apple unveils iPhone 13 mini, iPhone 13, iPhone 13 Pro, and iPhone 13 Pro Max. Also introduces new design for Apple Watch and Apple Fitness+.
- Apple introduces Apple Music Voice Plan for $4.99 per month.
- Apple introduces new generation of AirPods.
- Apple unveils game changing MacBook Pro with M1 Pro and M1 Max.
- Apple announces Apple Business Essentials service.
Meta Platforms (Facebook)
- In January 2021, Facebook bans President Trump’s account until he leaves office.
- Facebook and Blackberry reach settlement in global patent fight.
- Shopify to expand checkout system to Facebook and Instagram.
- Facebook restricts publishers, users in Australia from sharing news content.
- News Corp Australia and Facebook reach multi-year agreement to provide access to news and information to millions of Facebook users in Australia through Facebook News.
- Facebook announced 2 vital subsea cables to connect Singapore, Indonesia, and North America; will be first transpacific cables.
- Facebook oversight board upholds President Trump’s suspension, finds Facebook failed to impose proper penalty.
- In response to Oversight Board, Facebook suspends Trump’s account for 2 years, will be reinstated if conditions permit.
- Facebook debuts Portal Go, a video calling device which will sell for $199.
- Facebook introduces “Reels” on Facebook for iOS and Android in the US.
- Facebook changes company name to Meta Platforms.
- Meta Platforms acquires VR Fitness subscription service “Supernatural”
- Microsoft and SAP expand partnership and integrate Microsoft Teams across solutions.
- Microsoft wins U.S. Army contract for augmented reality headsets, worth $21.9 billion over 10 years.
- Microsoft accelerates industry cloud strategy for healthcare with the acquisition of Nuance.
- Amdocs expands strategic collaboration with Microsoft to boost service providers’ Microsoft Azure cloud service.
- Morgan Stanley and Microsoft collaborate to accelerate cloud transformation.
- Deluxe announces collaboration with Microsoft to provide HR, Payroll, and Accounting tools for Small Businesses.
- Microsoft acquired RiskIQ to strengthen cybersecurity of digital transformation and hybrid work.
- Microsoft acquires CloudKnox Security to offer unified privileged access and cloud entitlement management.
- Microsoft Azure revenue grew 51% in JunQ vs. 50% in MarQ and 50% in DecQ.
- Microsoft’s Windows 11 to be available in October 2021.
- Microsoft acquired TakeLessons, an online class website service.
- Microsoft and Truveta announce strategic partnership to accelerate Truveta’s vision of saving lives with data.
- Microsoft acquires Two Hat to collaborate on online safety and digital wellness solutions for online communities.
- Microsoft Office prices going up 20% for some business clients unless they move from monthly to annual subscription.
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.
- 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.
- 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.
- 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 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.