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OFFON

Etienne Monceau

Junior Analyst
This young engineering student, who quickly discovered a passion for markets, is also a fan of surfing, snowboarding and wide open spaces. He dreams of a democratized financial world, where everyone can make their assets flourish, ignoring the jargon of experts and having the right information. At Marketscreener, he deploys his love of fundamental analysis (and company balance sheets!) in the hope of one day managing a private fund.

Apple, Meta & Alphabet: Cash machines at affordable prices

11/15/2021 | 11:53am EST

Besides being part of the tech giant club, Alphabet, Meta and Apple have something else in common that we might not suspect: they have remained affordable in terms of market valuation over the past 10 years. This is an essential characteristic for retail investors, yet rarely highlighted by professional analysts. But there are reasons behind these price levels, and the disinterest of a whole class of investors.

Even if this concerns all digital giants, it is true that since 2019, the FTC (Federal Trade Commission) and the DOJ (Department of Justice) are focusing their energy in particular on Alphabet, Facebook and Amazon.

The FTC is a government administration whose role is to protect the consumer against abuses of dominant position that result in higher prices or lower quality products or services. It must rely on antitrust laws and has the power to fine companies. It often partners with the DOJ, which takes on the criminal side of the investigation. The actions of these entities can lead to a dismantling of a corporate conglomerate.

It was in the 1890s that anti-trust laws were established in the US to prevent certain groups from acquiring monopolistic positions by using illegal means. Among other things, these laws made it possible to dismantle Rockefeller's Standard Oil conglomerate, which occupied more than 85% of the American oil market in the 1910s. A little later, Hitler's rise to power in Germany, helped by the concentration of activities in a small number of groups, led the US to support a policy of diversification, dismantling large groups. These laws were then shelved for more than 50 years, particularly under the Reggan administration in the 1980s, which believed that the government should not interfere with markets. According to its supporters, the liberalization of the Reggan years enabled innovation and American global dominance. According to CNBC, these ideas stayed, and the number of companies listed on U.S. markets has been cut in half between 1996 and 2016. So mergers and acquisitions are still really trendy, but the recent cases involving the three companies are leading authorities to question whether antitrust laws inherited from the 19th century are still appropriate in a largely digital-dominated environment.

The visibility on the future of Meta, Amazon and Alphabet seems to be compromised by actions led not only by the FTC (e.g. Apple vs. Epic Games) but also by the rest of the world, such as the 8 billion euros in fines imposed by the European Commission on Google over the last 10 years. Especially since in the David vs. Goliath battle, the majority will always support David.

These phenomena can partly explain the fears of investors on these different issues. However, according to our analyst Tommy Douziech, threats of decommissioning are now more of a perceived risk than a real risk. He adds that if a dismantling were to be carried out, it could lead to some companies being revalued at higher levels than the current one (because the new companies created would become pure-players). He cites the example of Youtube, still consolidated in Google services at the time of writing, or Twitch in Amazon.

Operators used to excellence

There are other reasons for the interesting valuation levels of Meta, Alphabet and Apple. When you study finance, one of the first things you learn is about revenue growth: double-digit growth is good, keeping it is better (but harder). In reality, while most companies do indeed see their growth attenuate at the rate of their market penetration (they then focus on costs), some are the exception. This is the case for tech giants, which, despite their size, continue their unbridled growth in a seemingly borderless market. The other side of the coin is that operators have become accustomed to these excellent results. Now, even the slightest deviation from expectations pays off. This is something we see frequently with Apple and its quarterly results. Sometimes, investors go even further, punishing for example the extraordinary (and well above expectations) performance of Netflix during the crisis. While the company announced 10 million new users in the second quarter of 2020 against 8 expected, it deviated by 6% on the markets. It is precisely this extraordinary achievement that did not please investors, because it is 'too good to be reproduced'. Some also adhere to the saying: 'buy the rumors, sell the news'. It seems that technology stocks are incorporating more important results than estimated in their prices. It is not the company that is surprising, but rather the analysts who were wrong. In my opinion, this lack of visibility and the price volatility during earnings season can represent an obstacle to the small newcomers who wish to invest in the giants of the Internet.

The world after

You might have been thinking something along the lines of: "anyway, Apple will never reinvent the iPhone". Sure, but yet, they keep on surprising us and consolidate their dominance with improvements that allow them to widen the gap with any competition (cloud, processors, AI...). These giants are cash machines, it's not too late to invest in them, but few people accept this rather bland reality.

Table 1: Meta's share price, sales and quarterly EPS
Table 2: Apple's share price, sales and quarterly EPS trends
Table 3:  Alphabet's share price, sales and quarterly EPS

Analysts are talking in a similar way to the debate between passive and active management. When you retreat into such instruments, you take away the magic of markets and the excitement of your job.

For ETFs, Burton Malkiel proposes a golf analogy, already used in a paper by Mark J. Perry:

« It’s true that when you buy an index fund, you give up the chance to boast at the golf course that you picked the best performing stock or mutual fund. That’s why some critics claim that indexing relegates your results to mediocrity. In fact, you are virtually guaranteed to do better than average. It’s like going out on the golf course and shooting every round at par. How many golfers can do better than that? Index funds provide a simple low-cost solution to your investing problems. »

Extending this analogy, and applying it to an investment in tech giants, we then understand that there is nothing original about advising these positions. As Peter Lynch says so well: "No one can ever blame an analyst for having advised IBM 20 years ago". But today, and always, some analysts believe that their job is to find "the next Google", "the next Apple". The beauty of finance lies in this approach. However, this is reflected in the appalling statistics on the performance of most active funds (see SPIVA study).

I wonder if the Metaverse of tomorrow will be mainly composed of new players whose names we don't know yet, or of companies whose ticker is displayed in front of our eyes every morning when we turn on our computer screens. In the telecoms sector, some companies that seemed best placed to innovate have experienced a decline. 

These different reasons - the impression of being too late, the lack of interest of some professionals and the rapid transformation of our society - can partly explain the valuation ratios of these companies. However, as you will have understood, these stocks can perfectly meet your expectations.

Highly exposed groups

Digital groups are very exposed to the media. They get some good and bad from this exposure. For example, recruitment is rarely an issue for these companies. Even if the working conditions of Amazon employees have been the subject of controversy, this has never been a hindrance to the company's development.

The exposure of digital giants also led to many calls for boycotts, once again, Amazon is the easy target, but Twitter and Facebook have also been called upon to speak out about censorship, freedom of expression or the refusal to cooperate with the judicial authorities to arrest users considered dangerous. As for censorship, we remember the deletion of President Donald Trump's Twitter account after his supporters broke into the Capitol. Until now, these boycotts have had a very limited impact on the activity of these companies. But indirectly, it has caused authorities to take a closer look at these super-powered conglomerates.

The leaders of these companies are also highly publicized, and their entire lives are scrutinized. They have to be above reproach to avoid scandal. And the risk of scandal is very real. In the same vein, insider sales can be problematic for the quotation of these securities and the departure or death of a pioneer also represents a risk that must be taken into account. These events have an influence that is difficult to measure on the valuation of the shares in question, but what is certain is that the risk is much more pronounced in these companies than in a group such as Coca Cola, for example.

 


ę MarketScreener.com 2021
Stocks mentioned in the article
ChangeLast1st jan.
ALPHABET INC. -2.22% 2607.03 Delayed Quote.-7.97%
AMAZON.COM, INC. -5.95% 2852.86 Delayed Quote.-14.44%
APPLE INC. -1.28% 162.41 Delayed Quote.-7.35%
BELIEVE -0.79% 15.798 Real-time Quote.-6.51%
META PLATFORMS, INC. -4.23% 303.17 Delayed Quote.-9.86%
METALLURGICAL CORPORATION OF CHINA LTD. -1.74% 2.26 End-of-day quote.13.57%
TWITTER, INC. -6.60% 34.82 Delayed Quote.-19.44%