5 big tech stocks bargaining now

It’s been a tough year for the stock market, but even more so for the big tech stocks. From the start of 2022 through early August, the four largest tech companies lost an average of 14% of their value, including dividends, compared to a 12% drop for the benchmark S&P 500. (Prices, yields, and other data as of August 5th unless otherwise noted.)

The four largest tech companies also happen to be the largest US companies of any kind, according to market capitalization (price multiplied by outstanding shares). In order of size, Mega4 is apple (AAPL), Microsoft (MSFT), the alphabet (The Google) And the Amazon.com (AMZN). Over the past five years, its stock prices have more than tripled, each with a market capitalization of over $1 trillion. But investors are fascinated by what behavioral economists call “recentness bias,” or an excessive focus on recent events, so the losses over the past few months feature prominently in investment decisions.

Smart investors take a long look, both forward and backward. They look carefully at a company’s progress over the years and then try to predict a decade. With this type of analysis, it is clear that the 2022 decline is a buying opportunity for three reasons:

adaptability. Each Mega Four started with one big idea: search-based advertising for Google, personal computing for Apple, online shopping for Amazon, and operating system software for Microsoft. None of them gave up their original work, but all of them moved on to other sectors. Those transformations have been impressive and almost unique among companies. The flexibility shown by Mega Four bodes well for future adaptation to changing markets.

For example, each of the four is a pioneer in the highly profitable business of cloud computing, which allows users to store vast amounts of data remotely and securely, accessible anywhere in the world. Three-quarters of Amazon’s profit last year came from its cloud computing unit. For the quarter ended June 30, Microsoft Intelligent Cloud revenue represented 39% of the company’s total sales; Alphabet’s cloud revenue jumped 35% in the same quarter.

Even Apple, a manufacturer, realizes the value of cloud computing. Revenue from the company’s services division, which in addition to the cloud includes Apple TV +, Apple Music, Apple Card and the App Store, is growing three times faster than iPhone sales. Forbes expects revenue from services to reach $50 billion annually, outstripping iPhone sales by 2025.

All companies use a subscription model, the best example being Amazon Prime, to ensure cash flow. In addition, both Apple and Amazon have made significant investments in video production and streaming.

Alphabet YouTube, despite being banned in China, has become a huge global advertising medium, with 2.6 billion users. Meanwhile, Microsoft is one of the top three gaming companies in the world. Alphabet’s Google owns the Nest and Verily Life Sciences thermostats. Amazon owns Whole Foods market chain, with revenue of $17 billion. Alphabet’s Gmail is the largest in the world, accounting for 37% of all email slots last year.

Not all of the tech companies’ investments (or “other bets,” as Alphabet officially calls them) have paid off — Google Fiber, which brings ultra-fast internet connections to about a dozen cities, has been disappointing, for example — but the Mega Four have impressive track records. In acquisitions and a lot of cash to buy more companies. Of these three companies, Microsoft, Apple, and Alphabet collectively have nearly $300 billion in cash and short-term investments on their balance sheets.

Of course, Congress and regulators may stand in the way of further growth via acquisitions. But big tech companies have also grown naturally, with businesses such as Amazon Web Services, the world’s largest cloud services organization, set up within their own organizations.

profitability. The reason the Mega Four has so much money is that they are absurdly profitable. Take the return on equity, which is net income divided by shareholders’ equity (the net worth of the company, or what would be transferred to shareholders if the company were liquidated). According to Nasdaq’s primer, ROE “enables investors to identify companies that are seriously spreading cash to generate higher returns.” Apple’s current return on equity is 153%. In other words, raising $1 million in equity yields a profit of $1.53 million! For comparison, Zack’s, an investment research firm, reports the average for the microcomputer segment is 19%.

The fatal measure of profit is operating margin, or return on sales—that is, profits divided by revenue. For all US industries, the average figure is about 11%, but Microsoft is around 40% in the last twelve months, while Alphabet is around 30%. Amazon is primarily a retailer, so its profit margins are lower, but its cloud business has an operating margin of about 30%. There is no need to drown in stats. Suffice it to say that these companies are profit machines, even when the economy appears to be slowing as the Federal Reserve raises interest rates to thwart inflation.

evaluation. Now I get to the best part of the Mega Four story: these cheap stock. I can’t predict if they will get any cheaper in the short term, but it is clear that partnering in some of the best companies in the world is a better deal today than it was at the beginning of the year.

Alphabet, whose shares fell from $148 earlier this year to $117, now carries a forward price-to-earnings (P/E) ratio, based on consensus analyst earnings forecasts for the next 12 months, of 22, and Apple’s forecast of 27. Despite the recent bounce, Amazon is much less expensive than it was two years ago, and Microsoft has lost $59 per share since trading at $342 in November 2021.

The company that used to be the fifth largest in the US and now ranks 11th, meta pads (dead), the former Facebook, provides a stark contrast to the Mega Four. About 97% of Meta’s total revenue comes from ad sales, which declined in the last quarter due to weakness towards trends in the general global economy and increased competition. Meta is trying to make its own transformation, “moving beyond 2D screens toward immersive experiences like augmented and virtual reality to help build the next evolution in social technology,” says its latest earnings report.

Can Meta Management lead this kind of massive and risky transformation? That’s not certain, but when it comes to ratings, the Meta is hard to resist. The stock is down 50% this year, and the current price/earnings multiple is just 18. Meta and Johnson & Johnson (JNJ) has the same market capitalization, but Meta gained about 40% more in the last quarter.

Of all the ideas that led to the creation of the largest technology companies in America, Facebook was the simplest and most revolutionary. It completely changed the way we communicate with other people and turned the world of advertising on its head. Today, one in every six dollars in the world is spent on Facebook – twice as much as is spent on Google.

The main issue for Mega Fours – or Five – is their success. Realize that the market battleground is full of giant winners turned losers, General Electric (GE) being the prime example. There are no guarantees in investing. But when the market in companies is deteriorating due to the state of the economy, this is the time to buy the best.

Table showing P/E ratio and annual returns for GOOGL, AMZN, AAPL, META and MSFT stocks

Headed by James K. Glassman Advisory, a public affairs consulting firm. He does not write about his clients. Of the stocks mentioned here, he owns Microsoft and Amazon.com. His latest book is The Safety Net: A Strategy for Reducing the Risk of Your Investments in a Time of Turmoil. You can reach him at James_Glassman@kiplinger.com.

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