Is that a hint of trouble at the US tech titans?

Michael Baxter looks at Apple, Amazon and Alibaba

Article updated: 2 February 2018 12:00am Author: Michael Baxter

Together they have a market cap of $2.9 trillion, in the latest quarter, combined revenue hit $194 billion, profits surged, the race to see which company can hit one trillion first may be decided later this year, but there’s trouble too, with three of the four companies seemingly facing quite serious challenges. Maybe we should be looking at another tech when we consider who will win the race to $2 trillion.

In the race to one trillion and then two trillion dollars market cap, there is something the main contenders have in common. 

And that’s the letter A: Apple in the lead, Alphabet in second place, Amazon seems to be racing hard, but waiting in the wings is Alibaba, the Chinese Amazon/Facebook/Google, but of course Aramco may steal the march on all of them.

As for Facebook, it seems to be losing is lustre - though I haven’t given up on the company hitting a trillion eventually, I think the momentum is against it winning the prize.

The numbers

In the latest quarter, Apple posted profits of $20 billion - not only was that a record for the company, it was a world corporate record too. Alphabet/Google made a profit of $6.8 billion before a one-off tax charge of $9.9 billion, but in a way that charge was a good thing, from the company's point of view, the one-off charges relates to changes in corporate taxes in the US, which are going down, the one-off boiled down to accountants trying to optimise tax efficiency. Facebook saw a profit of $4.3 billion, while little old Amazon, the minnow of the four saw profits of $1.9 billion.

Except of course, when you look at revenue, Amazon is a giant. Apple still sits in the top slot, revenues in the latest quarter were up 13 per cent at $88.3 billion. Amazon saw a 38 per cent rise in revenue to $60.5 billion. Alphabet had revenues of $32.3 billion, up 24 per cent. And Facebook had revenues of $13 billion, up 47 per cent.

As for Alibaba, in the latest quarter, revenue was $13 billion, up 56 per cent.

Not all good

But for Apple, sales of smart phones fell - not by much for sure, down 0.1 per cent.

With Apple, the problem is not new. We have known for some time that people are coming around to the view that they don’t need to upgrade their phones every two years. The Apple fix of course is to charge more per phone - and reading between the lines, within the latest Apple results, it seems that sales of the iPhone X, the $1,000 plus phone, are looking promising.

Facebook is seeing users spend less time online. We already guessed this. The boss, Mark Zuckerberg is grappling with the problem of fake news, but also, and this is garnering less attention, fears that too much content from third parties is appearing in our Facebook newsfeed. He wants to see more user generated content. But can this strategy work?

Facebook has the classic publishing dilemma of finding the right mix of advertising and editorial and I wonder whether it is reaching the point when advertising is putting users off. Then again, a 61 per cent growth in profits is not bad, but with a PE ratio like the one Facebook has, it needs high growth just to justify the valuation. The question with Facebook, for the time being, is not can it carry on growing, but can it grow fast enough to support the valuation?

Threat of AI

But while all the techs have been investing heavily in AI, I think all of them could be disrupted by it. Google and Facebook grabbed 60 per cent of digital advertising in the US last year. Their collective appeal is that they enable the targeting of ads with extraordinary accuracy. But AI, applying neural networks and deep learning, may enable traditional publishers to start targeting their ads with comparable accuracy. I suspect that the Google/Facebook duopoly will see their share of the advertising cake fall, but their hope is that as advertising becomes more effective, the cake will grow.

Amazon does have a veneer of invincibility about it, but AI may yet hand competitors an edge and afford the advantage to specialist retailers that can master digital.

Apple’s problem is that it is behind its rivals in AI, apparently.

Opportunity

But I still rate the Facebook VR subsidiary Oculus Rift, it just needs time. Apple is moving into the premium online TV business, investing in content. I understand that the Apple watch is seeing traction and Apple is focusing on augmented reality.

Alphabet is so diverse now, and Amazon, well it’s got some very substantial fingers in lots of pies: the cloud, premium content, voice recognition home hubs and err, another area, oh yes, shopping, which it is boosting with corporate acquisitions.

I suspect Apple will win the race to a trillion - a race that may be over before the year is up. But I would not be shocked to see Amazon overtake it before the decade is up, but I wonder whether Alibaba may win the race to two trillion.
I can’t say for sure which of the techs is the most exciting, but collectively I think they are still the companies to watch.

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Michael Baxter

Economics Commentator

Michael is an economics, investment and technology writer, known for his entertaining style. He has previously been a full-time investor, founder of a technology company which was floated on the NASDAQ, and a director of a PR company specialising in IT.