Are the tech giants over-valued or is this just the beginning of the story?

Just two years after becoming the world’s first publicly listed company to have a $1 trillion stock market value, Apple passed another milestone this week by becoming the first US company (and only the second in the world) to hit a market capitalisation of $2 trillion, with each share worth $468.40 in intra-day trading.

Apple’s shares have risen more than 50%* this year and by more than 100%* since the market lows in March, despite the company having had to close its stores during the global lockdown and having come under political pressure about both its reliance on China and allegations of anti-competitive behaviour.

US tech giants benefiting from lockdown

Apple isn’t the only US tech giant to have experienced a surge in value during the pandemic: Facebook, Amazon, Alphabet, Netflix and Microsoft have also benefited from people around the world spending more time at home and relying more on ecommerce, video streaming and other internet services.

According to Joseph Firth, an investment specialist at Legal & General Investment Management, these six firms were already the very largest in the S&P 500, so their continued outperformance relative to the rest of the market means that they now represent more than 25% of the index for the first time in their history.

AXA Framlington American Growth fund has five of these companies in its top ten holdings with a combined portfolio weight of 26.93%**. Just Netflix is missing from manager Stephen Kelly’s highest conviction stocks.

Four of the six are also favourites of Fidelity Global Special Situations: Apple, Microsoft, Alphabet and Amazon are the fund’s four largest holdings^.

Are these companies over-valued?

Many investors wonder whether they have missed the tech party or if these companies are overvalued and due a correction. According to Refinitiv, Apple’s recent stock rally, for example, has left it trading at over 30 times analysts’ expected earnings, its highest level in more than a decade.

“While we acknowledge that the environment for tech is likely to stay positive for now,” Joseph said, “could these six stocks underperform to the same extent that they’ve outperformed in recent years? Stranger Things have happened.”

In a recent podcast, Martin Flood, co-manager of Lazard US Equity Concentrated, told us why his fund was avoiding most of the tech giants.

…or is the story only just beginning?

Fidelity’s Jon Guinness and Sumant Wahi, on the other hand, argue that the connectivity enabled by the top seven ‘super platforms’ of Facebook, Google, Amazon, Apple, Microsoft, Tencent and Alibaba is unprecedented in human history and only just beginning.

Tencent and Alibaba are both top ten holdings in Invesco China Equity fund, with 9.63%^ and 7.71%^ allocations respectively.

Scottish Mortgage Investment Trust also holds both stocks** – along with Amazon, Alphabet, Netflix** and Zoom^^.

Jon and Sumant cite the latter’s overnight success as an example of this connectivity advantage. “Six months ago, barely anyone had heard of video conferencing system Zoom. Today, it’s ubiquitous among businesses and the public, and its share price is up 230%,” they said.

“Zoom was able to scale its daily users from 10 million in December 2019 to 300 million in April 2020 by tapping into the cloud network Amazon Web Services (AWS), which seamlessly flexed capacity on its servers and data centres located around the world.

“For us, it’s not necessarily what the future holds for these big companies that’s most important, but how the systems and services they provide have unlocked opportunities for a whole set of other businesses and industries – that’s where the opportunities lie.

“For example, games publishers such as Activision Blizzard could leverage platforms, social and dating apps could expand their user bases, online grocers could tap into new markets, and newly established streaming players such as Disney+ could quadruple subscribers to 200 million.”

Chris Ford, manager of Smith & Williamson Artificial Intelligence fund told us more about Netflix, Disney+, Ocado and Activision Blizzard in this podcast interview:

“We have travelled though the first internet wave marked by the super platforms becoming global phenomena,” concluded Jon and Sumant. “Today, we are at the start of the second wave where companies that utilise these platforms can use their connectivity to build enormous global businesses. There is more to come from the connectivity revolution.”

*Source: Yahoo finance, 19 August 2020
**Source: Fund factsheet, 30 June 2020
^Source: Fund factsheet, 31 July 2020
^^Source: Fund factsheet, 31 May 2020