about 4 years ago • 3 mins
Most US tech companies – the stock market’s big dogs – have now reported their quarterly updates, and their investors have been all smiles. Or mostly smiles, anyway.
The information technology sector and communications services sector – to which Facebook and Netflix belong – represent about 22% and 10% of America’s stock market respectively. And given America’s stocks comprise around half the value of the global stock market, it’s hardly a surprise tech sector updates are so closely watched by investors all over the world.
A company’s stock price generally rises when its earnings – including its revenue, profit, and cash flow – exceed expectations, since the subsequent boost to its current value (all else being equal) should make for an even more valuable company in the years to come. That’s one reason Apple, Microsoft, and Amazon’s shares rose following their better-than-expected updates.
But stock price moves aren’t always that straightforward. Facebook’s earnings beat investors’ predictions, but its share price still fell. Chances are it was a victim of its own success: the company’s fourth-quarter profit has been an average of 10% higher than investors’ predictions since 2015, but this time it only scraped past expectations by 1%. So while its performance was still technically “better than expected”, Facebook likely fell short of investors’ more informal expectations.
It’s impossible to talk about Big Tech these days without mentioning cloud computing. It contributes a third of Microsoft’s profit and the overwhelming majority of Amazon’s. It’s so competitive, in fact, that Google-parent Alphabet is thinking about getting out of the cloud game altogether if it can’t keep up with them. That might be just as well: investors traditionally haven’t been forgiving when cloud businesses turn stormy. Case in point: shares of Software AG fell 12% on Wednesday after the company revealed growth of its cloud computing business missed expectations last quarter. And so did those of Europe’s largest tech firm, SAP, when it revealed growth of its cloud computing business would've slowed if it hadn’t signed a major deal last quarter.
With a US election later this year, investors are weighing the risk of owning tech stocks. The US government is already assessing whether a few of the biggest tech firms are too big, unwieldy, and dominant – and the threat of being broken up could become even more pronounced if a Democratic candidate takes the White House. Tech regulators further afield aren’t helping matters, either: European governments plan to introduce taxes based on tech firms’ revenues rather than profits, adding pressure to their bottom lines.
Tech’s continued ascent in January bodes well for typically expensive “growth” stocks, whose high earnings growth is expected to continue. They’re typically compared to “value” stocks, which tend to have more attractive valuations but grow slower. Since the financial crisis over a decade ago, growth stocks have significantly outperformed value stocks. But according to fresh analysis, the tide might now be starting to turn.
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