over 2 years ago • 3 mins
Apple reported a better-than-expected quarterly update late on Tuesday, and its stock’s initial record high might be giving the tech giant delusions of grandeur.
What does this mean?
Apple’s total revenue and profit for the quarter beat investors’ expectations, which was a good start. But investors were more impressed by its iPhone sales, which were up by a better-than-expected 50% on the same time in 2020 despite the impact of chip shortages last quarter. That matters because the more of Apple’s smartphones in the world, the more hope the company has of driving users into the arms of services like Apple TV+, Apple Music, and the App Store. And it seems to be doing okay so far: sales from its services segment were up a higher-than-expected 33%, which – given that services are much more profitable than cost-heavy hardware – helped Apple’s profit beat forecasts too.
Why should I care?
The bigger picture: Smartphones are forever.
Apple’s clearly feeling confident about its iPhone’s chances: the company just asked its suppliers to help boost iPhone production by 20% this year, bringing the total to 90 million units. That might’ve settled the nerves of skeptics who were worried by recent earnings announcements from Asian chipmakers TSMC and Hon Hai. Their semiconductors are an essential part of the smartphone ecosystem, but neither of their updates seemed promising for the devices: the former posted a potentially worrying drop-off in smartphone revenue, while the latter’s consumer electronics unit was the slowest-growing among its three main divisions.
Zooming in: There’s growth in services.
Apple’s top priority is to make money from subscriptions to its services, whose higher margins have a bigger effect on earnings and cash flow than sales of iPhones or Macs. The company generated just under $33 in average per-user services revenue last year, and it could double that by earning $5.50 from every user every month. That’s not impossible considering people pay more for services like Spotify and Netflix, and it could add at least another 20% to Apple’s valuation.
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Microsoft and Alphabet announced stronger-than-expected quarterly results late on Tuesday, as they sold investors on the benefits of working from home all over again.
What does this mean?
Microsoft grew revenue from its computing and gaming segment by a better-than-expected 9%, its cloud computing business by 30% (even if that particular area was still smarting from the loss of a $10 billion US government contract), and its productivity business – services like Office 365 that continued to benefit from remote working – by 25%.
Alphabet’s ad business across Google and YouTube likewise came good, shooting way beyond investors’ expectations – as did its similarly WFH-boosted cloud computing business. And since Alphabet and Microsoft both managed to keep their costs in check, they turned in higher profits than expected too.
Why should I care?
For you personally: Cut Big Tech down to size.
Big Tech stocks – these two, plus Amazon, Facebook, and Apple – collectively make up over 20% of the S&P 500, the key US stock market index. And since it’s weighted by market capitalization, their influence is only going to keep growing as these giants do. But there is an equal-weighted S&P 500 index you can invest in where every company – no matter its size – represents 0.2% of the index. And over the last 20 years, it’s actually outperformed its much higher-profile sibling by almost 90%.
The bigger picture: Buy into the megatrends.
There are a number of “megatrends” expected to define the next couple of decades, and a couple of them are playing right into Big Tech’s hands. Ecommerce, for one: shoppers searching for products is Google’s bread and butter, as are the paid ads that appear at the top of the results. And for another, the cloud-driven digital transformation market will be worth an estimated $3.6 trillion by 2026 – rewards it’s hard to see reaped by anyone other than the likes of Microsoft.
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