Big tech comes in many shades, so spot trends

These giants of the US stock market have dominated much of the financial press as valuations have rocketed.

But the term ‘tech’ is an incredibly broad one to describe a group of very individual companies operating with different business models and varying exposure to a variety of themes and trends. In order to fully understand any potential investment, it is important to identify the threats or opportunities to each company’s revenues and future growth.

Alphabet and Facebook derive the vast majority of revenue from advertising – around 83 per cent of Alphabet’s revenues are advertising derived from its Google search segment (Alphabet Inc), but with increasing advertising revenues from other areas such as YouTube which has seen a dramatic increase in viewing numbers during the lockdown period.

Facebook is even more heavily reliant on advertising, with 98 per cent of business revenues coming from advertising in Q2 2020 across its different business segments and family of social media platforms (Facebook). A significant proportion of this ad revenue is driven by small and medium-size firms rather than global corporations.

Advertising as a main source of revenue could be a major issue for both Google and Facebook as businesses are not locked into long-term advertising contracts. It is incredibly easy for businesses to switch off their digital marketing spend, making it a prime target as a cost-cutting measure.

The subscription model has gone wild over recent years but Netflix introduced the concept back in September 1999 for a DVD rental service. In 2007 it launched an online streaming service and took the subscription model into the digital age. The rest, as they say, is history, the company now boasts just shy of 200 million subscribers globally. It is also seeing a higher proportion of subscribers sticking with the service after their trial expires.

The fact that Netflix has chosen the subscription path means it has reliable and clear revenue streams that an advertising model would not have provided.

It also has a product which offers incredible value for money in terms of the price versus the amount and quality of content received.

Apple drives the majority of its revenues from physical products, making up some 82.3 per cent of sales, with the vast amount of these sales coming from its headline product, the iPhone.

The company is currently trying to shift its reliance away from product sales and is focused on growing it services segment.

The more people are reliant on the Apple ecosystem for apps which only run on an iPhone, the less likely they are to switch out their iPhone for another mobile brand.

Amazon’s revenues are also derived from physical products, whether that be its own products or other sellers through the Amazon retail website. Although already a giant, Amazon has plenty of room for growth in the retail space with online sales expected to make up only 16.1 per cent of global retail sales in 2020 (Statista).

No other technology company mentioned previously has such a diverse portfolio of revenue streams as that of Microsoft.

It has a big stake in cloud computing, an industry that is growing rapidly. We are also seeing the rise of Esports, another theme Microsoft is primed to take advantage of through its gaming segment which produces hardware such as the Xbox. Microsoft already sells its Office software on a subscription basis, making future revenues more predictable.

To conclude it is important not to get too caught up in the idea of big tech as a single entity. These companies are all unique and all have advantages and disadvantages in the ways in which they operate and the themes to which they will expose an investor.