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Are technology shares still a good buy?

A review of the first-quarter results of technology companies such as Microsoft, Amazon, Facebook, Twitter, Netflix and Google.

A review of the first-quarter results of technology companies such as Microsoft, Amazon, Facebook, Twitter, Netflix and Google.

by
John Redwood

in Features

30.04.2019

We have seen in the first quarter of 2019 reports that the technology majors of the US continue to hoover up revenue, as more business switches to a digital solution. More shoppers buy on line rather than in traditional retailers’ stores. More adverts appear on social media at the expense of traditional media companies. More consumer money goes on mobile devices, apps and related services. More people watch films and listen to music on downloads. Business is forced to spend more and more on combatting cyberattacks, and on providing slicker access to their services through websites and apps. The suppliers of capacity and service to go digital expand rapidly. The technology-oriented sectors of the US market have once again led the market as it rises.

Microsoft

Microsoft, a mature tech giant, grew revenues at the relatively lively pace of 14%. It has led the way with cloud capacity, which is much in demand. Turnover rose 14%, with profits up 19%. Shareholders saw $7.4bn money back in dividends and share buy backs in the quarter. Cloud revenue advanced by 41%.

Amazon

Amazon expanded sales by 17%. It converted much more of the growth into extra cashflow and profit. Net income surged from $1.6bn in the first quarter of 2018 to $3.6bn this time.  Annual free cashflow trebled to £23bn in the year to the end of the first quarter 2019, up from $7.3bn in the previous 12 months. The shares still sell on a very high multiple of profits, and the business is still full of spending plans to grow in various directions, but it is encouraging to see such progress with generating cash and declaring profit. Amazon has huge ambitions globally and in several sectors.

Facebook

The position at Facebook was more mixed. The group is dependent on advertising revenue, and was hit by criticisms of its business model and its failure to control what is posted last year. Its cashflow and profit was knocked back by a provision for a possible $3bn fine. Revenues grew by 24% despite this, but costs grew faster as the company tries to find ways to regulate itself more successfully.

Twitter

Twitter too was combatting some of the difficulties of substantial public exposure. It reduced its number of users over the last year by purging itself of bots, fake users and other undesirables. It is now asking investors to concentrate on the figures for “monetisable daily active users” where it claims 134 million. It showed good increases in profits and earnings.

Netflix

Netflix saw growth in paid for adverts at 16%. It remains a very cash hungry business, as it buys entitlement to expensive content. This could become dearer as Apple and Disney do more in this same market to the benefit of film makers and creative talent trying to find outlets for their work.

Alphabet

Alphabet’s figures disappointed the market. Whilst they knew about the EU’s €1.5bn fine, which meant earnings fell, they were also worried about the lower rate of growth in sales and the slower rate of revenue growth from adverts, the key to the Google business model. Revenues expanded at 17%, a rate which most other businesses would love to achieve. The company also increased net cash. Costs were rising strongly as the business takes more action to self-regulate and improve service levels.

Conclusion

The main trend of more and more revenue passing to the digital giants from conventional businesses continues. This is the underpinning of the continued outperformance of tech-oriented sectors and companies compared to the average of the rest of the market. People like the low cost or free access they get to many of these services thanks to the ad-driven model. They like the ease of use, to buy from your living room, to see film on the move, to stay in touch and get help with what you are trying to do wherever you are. This provides plenty of opportunities for the digital companies to increase revenue and to offer more service.

Meanwhile there are some negative forces to take into account. The more important and universal these groups become, the more governments will wish to regulate and tax them more. We see big increases in costs in many of these businesses as they move from wild challengers to established company behaviours. They are competing with each more and more as they all strive to find the fast-growth areas to occupy. There will be limits to how much advertising revenue online there will be in total, limiting free service models. There will be more customer resistance to paying directly for services. There will be more cases of fines for bad conduct.

Gradually we should expect price earnings multiples to subside as the companies mature and generate more proportionate profits for their revenues. As Apple shows, it is possible for a PE multiple to fall away and for shareholders to still make good money, if the growth continues sufficiently.

From these results it looks as if tech is still winning enough, despite the worries in the wind over maturity, regulation and tax. As the Nasdaq tech-rich index hits new highs we should acknowledge the pace of share gains so far this year is unlikely to be sustained, but it is encouraging for longer-term holders that more of these businesses are now generating solid profits and converting more revenue growth into shareholder cash.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

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