For the past decade, the US tech giants have become the biggest, richest and most powerful corporates on the planet.
They have made early-stage investors rich, as the market capitalisations of Amazon, Apple, Google-owner Alphabet and Microsoft surged past $1 trillion (Dh3.67tn), while Facebook and Netflix have also flown.
Even the coronavirus pandemic has worked in their favour. While other companies saw revenue collapse as populations were ordered to stay at home, the tech giants enjoyed a rush of demand.
What do you do, if you are locked down at home? Go shopping on Amazon, play with your iPhone, Google stuff, contact friends on Facebook, stream movies on Netflix or hold meetings with co-workers on Microsoft Teams.
The tech titans were starting to look unstoppable, until last week. As the stock market recovery continued, they fell behind. Was this just a blip, or sign that the sector has finally overreached itself?
Matt Weller, global head of market research at Gain Capital, says less fashionable sectors are now playing catch up. “In a development many believed impossible, Facebook, Apple, Amazon, Microsoft and Google market leaders are dramatically lagging the lower quality, old economy stocks.”
May’s top S&P 500 performers include what he calls “two stodgy, traditionally brick-and-mortar apparel companies”, L Brands and Gap.
Mr Weller expressed astonishment to see these “highly-indebted retailers, which cannot conduct business at most of their locations, outperform highly-profitable, internet-enabled behemoths” at the top of the tree.
The big five have “fortress balance sheets, generate massive cash flows, and offer sustainably high returns on equity” but there is one major worry: they cannot justify today's sky-high valuations any longer.
Apple and Microsoft are vying for the title of world's biggest company, each with a market cap of around $1.37tn. Amazon is close behind, at $1.19tn; Alphabet is worth $967 billion and Facebook $642bn, with Netflix a relative minnow at $181bn.
Sheer size makes it hard to grow at speed. Even if they could, Mr Weller says anti-monopoly regulators would have to step in.
Mr Weller suggests investors look past the tech giants to go "dumpster diving”, buying sold-off stocks with greater upside potential. “These can be found in sectors such as energy, airlines, consumer discretionary, cruise liners and everyone’s favourite embattled manufacturer, Boeing,” he says.
History shows that distressed “value” stocks like these typically see the most explosive short-term upside as the global economy returns to a semblance of business as usual, Mr Weller adds.
Moukarram Atassi, head of investment management at National Bank of Fujairah, believes the tech titans will prove hard to dislodge. “Their presence in our daily lives and the speed at which they achieved that is unprecedented.”
He says understanding how to manage and monetise data is the key to their success: “Google and Facebook know more about your habits, preferences, lifestyle, buying behaviour and risk profile than your own bank or insurer.”
This data is a “gold mine” and will further enhance their dominant position, he says, "especially in the emerging field of artificial intelligence, with many applications in healthcare, autonomous cars, consumption, banking, insurance and so on".
Mr Atassi acknowledges that no company is too big to fail, pointing to General Electric, the oil majors, car manufacturers, financial companies and banks as dominant oligopolistic companies now trading at a fraction of their peak valuations. The same could happen with big tech, although for now, it does not seem likely.
Peter Garnry, head of equity strategy at Saxo Bank, also sees echoes of earlier overhyped investment themes, such as the “Nifty 50” – US large caps that were seen as solid buy-and-holds in the 1960s and 1970s.
Yet he also thinks the tech titans will justify their continuing popularity. “We are more concerned about the mid-cap technology segment just below them, where valuations have been inflated most," he adds. "This could lead to disappointing future returns as expected growth cannot be delivered."
Russ Mould, investment director at UK wealth platform AJ Bell, would still buy Amazon. “Even the firm’s $1 trillion-plus market cap is not preventing its stock from hitting fresh all-time highs,” he says.
Microsoft's cloud computing capabilities, Skype acquisition, and its successful Teams workplace chat, video and storage operation also make a strong investment case.
Facebook’s shares have been resilient too. “Consumers are still happy to pay the price of privacy in exchange for not paying with money to use its service,” he says.
Mr Mould is more wary of Apple, as iPhone and tablet sales were hit by store closures. “Its shares had a phenomenal run last year, even though sales and profits barely grew, and were already looking fully priced. However, sales should lift as China reopens, with Europe to follow.”
Alphabet looks weakest right now, he says: “This reflects concerns over global advertising spend, as corporations rationalise costs and cut marketing budgets.”
With the exception of Netflix, the tech stars boast strong balance sheets, with a combined net cash pile of $212bn, the same level as in 2014, Mr Mould says. “That is despite lavishing $290bn on capital expenditure and $450bn in dividends and share buy-backs over the period.”
Last year, profit margins averaged 17.7 per cent. Free cash flow has totalled a whopping $485bn in the last five years, "even though Netflix has only contributed outflows over the period”, Mr Mould says.
Last year, profit margins for the big six averaged 17.7 per cent. Free cash flow has totalled a whopping $485bn in the last five years.
They trade on an average valuation of 38 times forward earnings for 2020, but Mr Mould says they can still justify that pricey figure. “Their earnings are forecast to grow 34 per cent next year and 19 per cent in 2022, which would cut that valuation to just 24 times earnings. If those forecasts are accurate, they could remain all-conquering.”
Regulation is one potential threat. “Amazon is set to be hauled before Congress to explain how it uses data, while Apple, Alphabet and Facebook have all had disputes with the taxman, antitrust regulators or privacy campaigners," he says.
Inflation is the other danger, Mr Mould adds. "Investors have been willing to pay high multiples because there are few reliable growth stocks around. That could change if government and central bank stimulus boosts markets, and undervalued stocks play catch up.”
Vijay Valecha, chief investment officer at Century Financial in Dubai, also backs big tech as the pandemic acts as an advertisement for cloud services, online retailing, gaming and streaming. “New users are unlikely to abandon the technology when the pandemic is over.”
It will also force more businesses to complete their digital transformation, accelerating a trend that was already under way. “Companies will continue to use Microsoft Teams, especially if working from home becomes a permanent solution to safeguarding employees in an age of pandemics,” Mr Valecha says.
Amazon should continue to benefit from the shift to e-commerce, while Netflix subscriber numbers should rise as cinemas in some parts of the world remain closed.
He also highlights a less obvious tech play: online fitness specialist Peloton Interactive, which now has one million collective fitness subscribers as more people exercise at home.
Mr Valecha says payment specialist PayPal is well-positioned to capitalise on rising cash and mobile payments, while e-commerce specialists Shopify and ETSY offer platforms for online retailers. “Machine data analytics specialist Splunk is another tech stock worth investigation,” he says.
Mr Valecha adds that many investors will prefer to play the technology theme through exchange-traded funds, and recommends iShares Global Tech ETF, Technology Select Sector SPDR Fund and the Invesco QQQ Trust.