The US technology giants are still riding high after another successful earnings season showed them generating billions of dollars every quarter from their ever-expanding global customer base.
Facebook, Apple, Amazon, Netflix and Google-owner Alphabet, collectively known as the FAANGs, have been the investment story of the decade, and they are showing little sign of losing their bite.
The tech titans have powered the longest stock market bull run in history, generating 40 per cent of total US stock market growth last year, putting every other investment sector in the shade.
Apple, Alphabet and Amazon each now boast a market cap of more than $1 trillion (Dh3.67tn) — mind-boggling sums for individual companies — and their share prices continue to fly.
Russ Mould, investment director at wealth platform AJ Bell, says the big concern today is that despite their breakneck run of growth, the stocks are expensive.
Amazon, for example, trades at an astonishing 90.36 times forward earnings, and Netflix at 88.81 times, which is almost three times the current US S&P 500 average of 31.82, itself at an historical high.
Yet their competitive position makes them impossible to ignore, Mr Mould says.
"This level of consistent growth is rare in today’s low growth, inflation and interest rate world,” he adds.
Facebook's share price is up 26 per cent over 12 months, according to Bloomberg, with Amazon up 30 per cent, Alphabet up 35 per cent and Apple up a thumping 90 per cent, lifting its market cap to $1.4tn.
Only Netflix has stalled, rising around 6 per cent, but then it is the relative minnow, with a market cap of “just” $160 billion.
Early-stage investors have made fortunes on the back of this. If you had bought 100 shares in Amazon when it floated in 1999 at $18, for example, you would have paid $1,800. Today, those shares would be worth $207,900, an increase of 11,450 per cent.
There have been stumbles and controversies on the way to global domination, including the Cambridge Analytica data breach affecting Facebook, and concerns about Apple's direction after the death of inspirational founder Steve Jobs. Plus they have been threatened with tighter regulation, due to tax, competition and privacy concerns.
The coronavirus is another worry. As Apple closes stores in China, Amazon vendors worry about a shortage of products and components from China, and Facebook and Google battle to stem the tide of fake news and misinformation.
Nothing lasts forever, so the question on every investor's lips right now is this: how much higher can they fly?
The FAANGS impressed again this earnings season, with Apple reporting record first-quarter revenue of $91.8bn, up 9 per cent, amid strong demand for the latest iPhone 11 and 11 Pro, and record sales for services and wearables.
Despite a mixed early reception, the Apple Watch outsold the entire Swiss watchmaking industry last year, shipping 31 million units worldwide, compared with 21 million for all Swiss watch brands.
Facebook continues to expand year-on-year although sales growth slowed to “just” 25 per cent in the fourth quarter, the slowest quarterly growth in four years, while it also has to spend more on research and development, protecting data and battling fake news.
Amazon’s stock soared as fourth quarter net sales jumped 21 per cent to $87.4bn, with its Prime, advertising, business services and cloud operations all performing strongly.
Alphabet’s total fourth quarter revenue grew 17.3 per cent to $46.1bn, slightly below expectations, as advertising, YouTube and Google Cloud disappointed. The Google parent slipped out of the $1 trillion club, but was soon back.
Netflix, meanwhile, added 8.8 million new subscriptions in the fourth quarter, beating expectations, with revenue slightly stronger than expected at $5.47bn, despite the launch of rival streaming services Disney+ and Apple TV+.
Apple and Alphabet are both sitting on more than $100bn in cash, while Facebook’s cash pile tops $50bn, and shareholders are reaping the benefits, Mr Mould says. "This is funding Apple’s dividends and meaty buyback programmes at Apple, Facebook and Alphabet, with shareholders receiving $83bn in the first nine months of 2019,” he adds.
The tech sector remains “relatively attractive”, despite signs of slowing spending growth, says Uwe Neumann, senior equity analyst in the IT & communication sector at Credit Suisse. “It will still outgrow the broader market, due to increased spending in 5G devices and infrastructure, and the migration to cloud computing," he says.
The tech sector's high valuations are the prime danger, as they increase the risk of a share price setback if growth disappoints, he adds.
Patrik Lang, head of equity research at private bank Julius Baer, also reckons their outperformance has further to run. “Technology stocks continue to grow strongly and their valuations are in line with historical averages," he says.
This is bad news for other sectors. “The FAANGs pose a challenge to other parts of the economy, particularly retail and media, which have been squeezed by tech giant competitiveness and transparency,” Mr Lang adds.
Maurice Gravier, chief investment officer at Emirates NBD, says the only global company that can match Apple, Amazon and Alphabet on size is energy giant Saudi Aramco, the only non-tech member of the "$1 trillion club" of companies. “The FAANGS alone now make up almost 20 per cent of the S&P 500,” he says.
The technology sector has come a long way since the dot.com crash in 2000, when values were dramatically overstretched. Investors are not losing their heads, as they were then. “Last year proved it again when the market ruthlessly rejected the IPO of The We Company, with its questionable financials, deficient governance and hilarious initial pricing,” says Mr Gravier.
However, Mr Gravier says the FAANGs are a different matter: “The tech titans are highly profitable, multidimensional, and dominant players in the tangible segments of the economy that they created: cloud services, streaming, e-commerce, social media, digital ads, payment solutions, and so on.”
They are continuing to grow, as they constantly reinvent themselves, reinvest billions to maintain their leadership, and broaden their offerings. “Technology never stops, and capturing data on half of the connected population of the world is a competitive treasure to develop the mind-blowing possibilities of artificial intelligence in particular,” says Mr Gravier.
The big question is whether they can penetrate emerging markets, too: “Access is not simple, local players are formidable, and China has no intention of sharing its consumer markets and people’s data with US players,” adds Mr Gravier.
Chinese titans, such as Tencent in social media and Alibaba in eCommerce and FinTech, are arguably as advanced technologically, and have ambitions for global leadership as well, he says.
While China is closed to the large Western tech firms, India has allowed entry, but on its own terms, pushing Amazon to invest $6.5bn locally. “The tech giants may struggle to replicate their success in emerging markets,” Mr Gravier says.
Political risk is less of a worry, though, he adds: ""France has just postponed its plans to levy digital taxes on US tech giants and we are not excessively worried about antitrust investigations either.”
Again, the big worry is the FAANG's sky-high valuations, which leaves them vulnerable in the short-term, although Mr Gravier believes their long-term prospects remain attractive. “It would be a mistake to underestimate them, and any material dip would certainly be an opportunity to, selectively, add.”
Nothing goes up forever. At some point, the FAANG-tastic five must slow or slip, but there is little sign of that right now. The tech giants look set to dominate our lives for years to come, and investors can’t really afford to ignore them.