Digital companies carry on growing despite headwinds

The pandemic brought many new customers into the digital space. Although there are supply and staffing issues hitting the sector, its larger customer base is still boosting earnings.

| 6 min read

Apple reported some headwinds from the microprocessor shortage in its third-quarter results. Amazon reaffirmed its priority was great customer service and stated it was spending much more on setting up and expanding a vast delivery network. It expects the pressures of Christmas, the driver shortages and the supply chain problems worldwide to impose more costs. Both companies’ shares retreated at the disappointments.

The US leaders of the digital revolution, Google, Amazon, Netflix, Apple and Microsoft saw accelerated growth during lockdowns. Many more people were forced to buy things online, to increase their devices and links to allow more homeworking and home entertainment and to learn how to use more of the services and facilities offered by the companies of the digital age.

As more normal life started to return over the change of year last winter market attention turned to recovery sectors and companies that would benefit from a resumption of more social contact, at the expense of slower performance from the stars of lockdown.

As this year has progressed most of the large tech-based businesses have shown they can still sustain lively rates of growth even as more normal life resumes. More people now have devices, more people now know how to use a wide range of digital services, and more people want a mixture of home and office, home and outside entertainment, home and college learning.

So far this year, Nasdaq had risen by more than 21%, with a gain of over a third over the last twelve months. The result is a stunning 200% over five years, with 124% up from the March 2020 low. There were falls after hours as the market started to digest the news.

Rapid growth continues

Despite some current setbacks the leading US companies have been reporting continued rapid growth in revenues into the third quarter of 2021, many months after the initial recovery from the lockdowns which so boosted them. Microsoft reported 20 % growth in the year to end September as its products are universally used at home and by business as the platform for everything else.

Google continues to dominate the online advertising market and has a strong lock on instant tv through You tube. Amazon sells more, constantly improving its offer and customer service. Apple remains a favourite for pads and phones, despite it running out of some of its past magic at innovation in devices. Its yearly figures to end September still achieved good sales growth. Amazon's nine-month total sales were up 27% comparing the period to September this year with last year. Several of these businesses are building revenues from the cloud, and all are exploiting the new-found happiness with digital devices by many of the population.

It is interesting to see how in an age of driver shortages and supply chain restrictions Amazon has gone out and recruited driver workforces and bought large numbers of new liveried vans to keep the supplies reaching homes rapidly whatever the item. It is true they too have experienced some limitations on product availability but can handle this quite well given the huge range of choice their catalogue offers.

Amazon, so far, has retained its relentless drive for excellence. It aims to be “the earth’s most customer centric company, the earth’s best employee and the earth’s safest place to work.” It has recently announced 150,000 seasonal jobs in the US with a minimum starting level of $18 an hour and sign on bonuses of up to $3000. It aims to be competitive in a tight labour market. This will hit profits.

Hybrid working boost

Many companies are now implementing hybrid working arrangements that requires consolidating and improving the technology solutions bought at pace in the early days of lockdown so that the business can continue with meetings where some of the team are in the office – and others are at home. More activities are likely to take place online as a result of the necessity to switch during the pandemic.

Many market share gains were made by those offering online banking, online purchasing, online entertainment and events. The service sectors of the world need productivity gains to afford the rising cost of labour and to contain the prices of their offerings. Many of these will come from digitalisation, robotics and artificial intelligence.

There are always things to worry about. The Biden Administration has talked in the past about taking action against their strong market power. Were they to do so and to require some break-up of the large companies it might reveal more value as the market came to value components of the business separately.

Only if they have some near monopoly power, which the state breaks, would it be bearish. It is true governments generally will wish to regulate the companies that publish material more fully, in the name of reducing harms from social media. This will come with a cost and will from time to time inflict reputational damage.

It is also true that worldwide there is resentment at US success and dominance in these areas, leading to demands for more and higher specialist digital taxes. On the plus side for the US the growing cold war between China and the US gives the US companies considerable freedom from Chinese competitive attacks in the world of US allies.

The media and governments remain far more interested in the green revolution. Their interest will be heightened by the COP26 meeting next week. This relies more heavily on government decisions and budgets.

Meanwhile, the digital revolution rolls on willingly in every home, office and business location. The pandemic gave it a huge boost, with market shares jumping. As the recovery from lockdown continues, we are seeing that the winning companies can still grow revenues on the newly-inflated base. Earnings per share have also done well, though the labour market and supply problems will dent this in the short term.

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Digital companies carry on growing despite headwinds

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