The Big Tech stocks made up of 6 stocks forming the TAMAMA acronym has done well this year so far.
Tesla, Alphabet, Meta Platforms, Amazon, Microsoft, Apple are all in a bull market, meaning they are up at least 20% when compared to the lows made in 4Q22. Just looking at the YTD returns, 5 of them have recorded YTD share price returns of at least 20%.
Meta is the strongest performer as it has more than doubled from its low and also recorded a YTD gain of nearly 90% while Alphabet is the “weakest” of the lot with a “mere” 17% gain this year
Resilient results underpin share price performance
The S&P 500 Index is up 8% YTD while the Nasdaq is up 18% YTD. As all 6 Big Tech has outperformed both indices, this effectively means that the Big Tech have carried the indices on their backs and is largely attributable to their resilient results.
Of the 6 Big Tech stocks, only Apple recorded declines in revenues for 1Q23.
Despite the weaker US dollar in recent months, data as at 8 May 2023 showed that the blended revenue growth rate for the S&P 500 for 1Q23 is 3.9%.
For companies that generate more than 50% of sales inside the U.S., the blended revenue growth rate is 6.1%. For companies that generate more than 50% of sales outside the U.S., the blended revenue decline is -2.1%.
This provides 2 insights for 1Q23
- Growth is stronger in the US than the rest of world and
- Big Tech stocks are mostly ahead of the pack
In fact, with the Big Tech making up a significant portion of the S&P 500, the growth rate for the remaining 494 companies is much lower than the blended, widening the gap even more between the Big Tech and the rest of the pack.
Of the Big Tech, the company with the largest domestic revenue exposure is Amazon. Amazon generates nearly 70% of revenues inside the US. Excluding Tesla which is an outlier in performance among the Big Tech, Amazon was the company with the highest revenue growth.
All this points to a potential situation where there is no alternatives. Investors end up buying more Big Tech stocks and this pushes the share prices up.
Embedded growth mentality
A growth mentality is embedded in these Big Tech companies which pushes them to not only keep up with the competition but also enter into new market segments and invest in new or upcoming frontier technologies.
This growth mentality became a sore point as the Fed raised interest rates and growth slowed leading many companies including the Big Techs sought to reduce the investments it made and cut their manpower.
Growth does not only come from new markets or business lines but can also come from diversification.
Alvin shared that Apple has diversified its manufacturing base to reduce geopolitical risk. These efforts has not only reduced its country of origin risk but also allowed it the opportunity to capture new markets. For Apple, diversifying their manufacturing into India means that it is easier for them to sell in India.
Alvin also thinks that Apple’s efforts to expand into new markets have already yielded positive results, as evidenced by its 15% revenue growth in Asia Pacific, excluding China and Japan. This growth is particularly encouraging, as it suggests that even markets with lower GDP per capita can afford Apple’s products. With this potential for growth, Apple’s expansion into new markets may continue to pay off in the coming years.
Microsoft is in the midst of acquiring Activision Blizzard. Although there currently seems to be regulatory hurdles, should the acquisition pan out, this will place Microsoft as the third largest gamin company by revenue behind Tencent and Sony.
Is the worst over?
One may say that there was never a “worst” for some of these 6 stocks who are amongst the most resilient companies on this planet.
For stocks like Meta and Tesla whose business are slightly more volatile and have their share prices driven by sentiments to a larger extent, it is clear that the worst is over.
Meta was able to cut costs and turn things around. Revenue increased YoY while sequential quarter profits improved substantially. Average User metrics also reflected increased daily and monthly visits to Meta’s four social media avenues (Facebook, Whatsapp, Instagram and Messenger).
It also seems like Meta has all but given up on its Metaverse ambitions for the near term. Although this was never officially announced, the number of mentions has fallen drastically and Meta is now focused on expanding its core businesses such as growing WhatsApp Pay in India and Brazil, the two countries which has the biggest population of WhatsApp users.
Tesla is another hallmark of the growth mentality.
Although there was a sequential revenue decline from 4Q22, 1Q23’s revenue was higher than any other previous quarter. The Tesla energy segment which includes the Powerwall energy storage system and the utility scale megapack system saw revenue increased 148% YoY, reflecting a new high.
After numerous price cuts, Tesla announced its first price increase in recent times to its premium Model S and X in two of its biggest markets, the US and China.
Closing statements
At the end of the day, a company’s valuation all boils back to its earnings and growth potential. For companies who are regarded as the numero uno in their industry, there tends to be a premium placed on their valuation as they are viewed to be more resilient as they are the leader of the pack.
There can also be a halo effect as investors may believe that nothing could go wrong for these stocks.
For example, Apple recorded a -3% revenue decline, the only one of the big techs to do so, but as the company exceeded market expectations, the share price increased after earnings were released.
It is clear that the worst is over for now. Even in its worst, the performances of these companies have been noteworthy and they have set out plans maintain growth and remain ahead.
It is important to question whether the share price increase of these big tech companies have run its course for now.
Investors will do well to adhere to the fundamentals when investing in these big tech companies and price them with an appropriate premium. Any discount that surfaces is typically in a short narrow timeframe and will be viewed by the market as an opportunity to load up further.
