“Who has led the digital transformation process of your company?: a) the CEO, b) the CTO, c) the “, reads one of the countless memes that clearly emphasizes the pandemic as the correct response. . Raise your hand if you haven’t accessed in the last few hours or spent the dead time orchestrating your next .
In fact, Sundar Pichai, the CEO of Alphabet, Google’s parent company, explained on April 28 to analysts who were dissecting their quarterly accounts how the coronavirus has caused “an acceleration in the long-term jump of companies to digital services, including more online work, education, medicine, shopping and entertainment.
The company’s shares have accumulated a positive return of 1.4% since the start of the year and only in April they rose almost 16%. Amazon has generated a profitability of 29% and last month it shot up 27%. Something similar happens with Microsoft, which maintains a positive balance of 14.5% in the year, or Apple, which registered a boost of 15.5% in April and rises 5.5% compared to the S&P 500, which leaves 12 %.
Amazon, Alphabet, Facebook and Microsoft weigh 21% in the S&P 500, the highest percentage in recent years
The new economy 3.0 was already present but the Covid-19 crisis has sharpened the division between the old and the new. “We’ve all become even more dependent on the products and services provided by these companies during the pandemic. They have great balance sheets and generate a lot of cash flow,” said Ed Yardeni, president and strategist at Yardeni Research. It is true that the power shown by the technological veterans has boosted the S&P 500 and the Nasdaq Composite, which this Monday came to stay at 6% of its maximum of last February.
But it also seems to limit the continuity of the escalation. The team led by David Kostin, from Goldman Sachs, appealed to the concentration suffered by the S&P 500 where Amazon, Apple, Alphabet, Facebook and Microsoft already account for 21% of the indicator’s capitalization, the highest percentage in recent history.
These strategists concluded in a report to their clients that the S&P 500 is trading 19.5 times above the 2021 earnings per share estimate, based on consensus forecasts, its highest level since 2002. Hence the possibility of a drop of up to 18% in the next three months. Warnings similar to those made by legends such as Stan Druckenmiller, president of Duquesne Capital, and David Tepper, founder of Appaloosa Management, in recent days and which caused more than one scare in the market. However, Alberto Bernal, chief global strategist at XP Securities, explained to elEconomista that the Federal Reserve’s decision to buy corporate bonds, some of them speculative, as well as the antibody tests and the gradual reopening of the economy are factors they do recommend to their clients not to exit the market. “Signs are that a second outbreak could be less severe and if this were the case, the assessments remain logical enough,” he notes.
Nvidia, Netflix and Adobe have replaced IBM and semiconductors among the most valuable firms in the stock market
The Fed has pulled out its arsenal and even called into question its own mandate with programs to boost the flow of credit such as its Secondary Market Corporate Credit Facility, run by BlackRock under the supervision of the New York Fed and which puts its attention on ETFs related to fallen angels, that is, debt of companies that had investment grade but whose rating has been lowered to speculative or junk, particularly due to the coronavirus crisis. “The Federal Reserve’s balance sheet has so far expanded by more than $2 trillion in the past two months, compared to $1 trillion in six months during the financial crisis, while Congress has also passed fiscal stimulus that far exceeds you outweigh the measures taken at that time”, highlights Zachary Apoian, strategist at Morgan Stanley Wealth Management, referring to the engines of the American stock market.
Apoian recalls that the market “does not usually wait for the economy to recover” and concludes that the pandemic is affecting stocks that are closely related to physical locations, those with complex supply chains, and those that are highly sensitive to economic growth. . That is why forced digitization has forced many companies to adapt overnight to new consumer habits, characterized by low mobility and lack of contact. This is a trend that does not intend to change in the medium term, which is why restaurants are turning towards online ordering and payment services, retailers have turned to digital marketing and e-commerce, patient care relies more and more on telemedicine , remote work has boosted collaborative technologies and banks are further promoting capabilities to operate with mobile phones.
Beyond the gods of technological Olympus, a total of 101 stocks, a good part of them technological, with a capitalization of more than 500 million dollars have reached maximums of the last 52 weeks so far in May. See for example PayPal, ServiceNow, eBay, Twilio, DocuSign or Okta. Within the Nasdaq 100, Zoom Video accumulate increases this year of 155% and Tesla of 90%, showing how the pandemic also deals a blow to the old economy, especially that related to the oil sector.
The industry titans
Although in the last five years investment in the industry has been dominated by the so-called FAANGs – the acronym that encompasses Facebook, Amazon, Apple, Netflix and the parent company of Google – if we look down to the next largest values by market capitalization, it has varied.
Historic ones like IBM, which has been listed since the late 1960s, and until 2017 was among the top 10, now occupies the twelfth position. This is also the case of names from the semiconductor universe such as Broadcom, Texas Instruments or Qualcomm, which in the last five years have been replaced by processor manufacturers such as Nvidia or software companies such as Adobe or Salesforce.com, the latest firms to join to the select club of technology companies that capitalize more than 50,000 million dollars. With the exception of Netflix and Nvidia, which despite the falls this week continue in the zone of historical maximums, the rest of the values remain between 1% and 20% of renewing their never-before-seen highs. And all but Cisco and Intel receive a buy recommendation from FactSet market consensus analysts.
With a market capitalization of more than a trillion dollars, Microsoft, Apple and Amazon have exchanged since the end of 2018 the scepter of the most valuable listed company. Since Wall Street bottomed out in mid-March, Microsoft, the firm that makes the Windows operating system, has taken the top spot and leads the next, Apple, by just $27 billion. The pandemic is being a favorable wind for the company, since some of its services are essential to carry out teleworking – and only its licenses, which entail maintenance and support, account for almost 30% of income – and its titles they are revalued by 32% from minimums. After this acceleration in the stock market, Microsoft is now almost twice as large as the energy and materials sectors.
The silver is for Apple, which could be affected by the effects of the recession and despite this, it registers 36% from its lowest level in March and is at a maximum of 8%. Experts argue that one of the main advantages of the Cupertino company is the large base of loyal customers it has for its products and services, as demonstrated by its first quarter accounts, which exceeded market sales and earnings expectations. For its president, Tim Cook, “when the country is resuming activity. From Bloomberg they point out that” in the second half of 2021, Apple should have higher shipments of high-end 5G iPhones.
And regarding Amazon, which is taking advantage not only of the confinement measures by the online commerce branch, but is also seeing its business grow in the cloud due to the increase in teleworking. It is, in Barclays’ opinion, “the best positioned company in our coverage universe (perhaps the entire market) to gain share during the current environment.”
Steady profit growth
Another of the keys when betting on these values is that they can maintain the growth of profits. And despite the fact that the impact of the coronavirus has reduced the forecasts compared to the estimates of the beginning of 2020, growth is still expected between 8% and 192% in the three-year period for the 10 largest in the sector. Thus, it is expected that the greatest growth will be Amazon, with expected earnings that will exceed 28.5 billion dollars in 2022, a historical record for the firm of Jeff Bezos.
Facebook will be the second to see its profit grow the most according to estimates, 63%. In this sense, the average investment firm has raised its valuation in recent weeks by 25% and has improved the profit estimates for the company for the whole of 2020 and 2021 in the months in which the pandemic has forced the governments of the planet to confine the population at home. In fact, according to FactSet data, the multinational will register a profit of almost 3,000 million dollars in 2020, close to 4,000 in 2021 and will stay close to 5,500 the next.
On the other hand, Cisco is the stock for which the market expects the shortest profit path, 8%. The company, which yesterday presented its results for the third quarter of its 2020 fiscal year, announced that its software subscriptions already represent 74% of total software revenue, up 9% year-on-year. “We are focused on achieving long-term profitable growth while providing shareholder value,” said Kelly Kramer, the firm’s CFO.
Alibaba sneaks in among the favorites of technology funds
Microsoft, Apple, Amazon, Alibaba and Alphabet are among the top five available-for-sale technology funds in Spain (with assets of at least 100 million euros), with annualized returns of over 20% in the last 3 years according to Morningstar. In the last two years, the Chinese e-commerce giant has caught up with its American counterparts, as have other names such as Salesforce.com, Advanced Microdevices, Synopsis or Samsung, to the detriment of Cisco, Facebook or IBM, which are no longer among the…
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