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As has so often been the case in the last several years, Big Tech continues to be the big story on Wall Street.
The top two tech ETFs by assets, the Technology Select Sector SPDR Fund XLK, +0.19% and the Vanguard Information Technology ETF VGT, -0.09% are each up about 27% year-to-date in 2019 vs. only about 18% for the broader S&P 500 SPX, -0.17%
Not all tech stocks are created equally. For instance, some old-school stocks, such as chipmaker Intel Corp. INTC, +0.36% and HP Inc. HPQ, -0.19% are barely break-even on the year despite the broader tailwind for tech. Similarly, some high-profile tech IPOs such as Lyft Inc. LYFT, -0.78% have failed to live up to their lofty expectations.
Even within the vaunted FAANGs — or FAAMNGs if you include the trillion-dollar Microsoft Corp. — in the typical list of Big Tech growth names, there are some who are clearly leading, and others who are struggling to keep up.
So which big tech stocks are looking good in 2019 as they approach new highs, and which ones look like they may be falling behind?
Alphabet — Follower
Despite changing its name in 2015, many investors still think of Alphabet Inc. GOOG, -0.57% simply as Google because, in reality, that’s still the only part of its business that matters.
In the quarter that ended March 31, for instance, Alphabet’s “Other Bets” projects were literally a rounding error at $170 million of $36.3 billion in total revenue, with the rest coming from Google-related businesses and fully 85% of its revenue from advertising efforts alone.
This is despite burning billions on side projects such as drone delivery, Waymo self-driving cars and other similarly fashionable “moon shot” projects that are the rage in Big Tech these days but have yet to deliver any tangible results. And sadly, these well-intended efforts are looking increasingly desperate after its Google unit missed on revenue in its spring earnings and nothing else seems to be stepping up.
Throw in European fines and activist investors looking to break up the company, and Alphabet’s future looks full of more challenges than opportunities. Wall Street seems to agree, too, since the stock is flat versus a year ago while other stocks on this list have powered significantly higher.
Amazon — Leader
In contrast to Alphabet, Amazon.com Inc. AMZN, +0.14% has managed to look beyond the core business that helped it make a name for itself in the dot-com era.
That includes the powerful profit driver that is Amazon Web Services, which represented roughly 9% of total revenue in 2018 but represented 74% of Amazon’s profit last year. This, along with other promising efforts like the popularity of its Alexa in-home assistant, ensures Amazon is evolving beyond a one-trick pony banking on e-commerce alone.
Looking forward, there is also big promise from Amazon and its Prime subscription service. Perks that include same-day shipping as well as streaming video hits like its original comedy “The Marvelous Mrs. Maisel” ensure loyal subscribers, which now tally as many as 100 million in the U.S., according to estimates. At $119 a year, Prime adds up to a roughly $1 billion annual cash cow — and while specifics are hard to come by, all indications hint that its growth rate continues to be red hot.
With a dominant position in e-commerce and promising growth in its AWS and Prime arms, it’s small wonder Amazon is approaching a new all-time high.
Apple — Follower
The concerns for Apple Inc. AAPL, -0.10% in 2019 remain the same as they ever were: Overreliance on iPhone sales, and challenges to growth in China.
On the surface, Apple stock continues to address those concerns to the satisfaction of many investors — case in point, its April earnings report that topped expectations and allayed concerns that the premium smartphone market was running into a wall. However, it’s still worth wondering what the long-term plan is and whether the iPhone is truly as bulletproof now as it was when it debuted way back in 2007.
Sure, Apple is spending handily on appeasing shareholders with a $75 billion repurchase plan. Apple won’t suffer a cash crunch anytime soon with its massive cash stockpile of more than $200 billion. But those are clearly not growth arguments, and don’t answer the question as to how Apple is leading the tech sector of tomorrow.
Equally troublesome is Apple’s “good” quarter this spring that featured a more than 20% decline in China revenue. And with Apple ceasing unit sales reports, investors may struggle to find evidence that its product mix is improving. For investors looking to something that proves Apple is more than the iPhone, there may not be a lot of encouraging details as the stock attempts to revisit September’s all-time high.
Facebook — Leader
As much as many consumers like to hate on Facebook Inc. FB, +0.76% for its snooping on their private information and as much as public officials like to rail against the social media giant for its role in distributing “fake news,” the simple reality is that Facebook has momentum behind it that is incredibly difficult to stop.
That’s because, despite the hysterical headlines, Facebook remains an unstoppable force with a 1.5 billion daily active users worldwide. That’s one out of every five humans on the planet!
Furthermore, it continues to push the envelope to optimize its all-important “revenue per user” and cash in on that massive audience, with first-quarter monetization in the U.S. and Canada up an amazing 27% year-over-year.
Scale like this has some policy makers worried, but Facebook has shrewdly insulated itself from regulatory risk by proactive steps such as an external oversight board to monitor content.
It also has managed to capitalize on Whatsapp and Instagram even as critics focus on its flagship product; some analysts estimate Instagram more than doubled its revenue in 2018, and continues growing at a breakneck speed. Throw in side bets like Facebook’s Libra cryptocurrency, and the stock has what it takes to hold its own in the near-term.
There are regulatory risks, particularly in a year where everyone seems to be hating on Big Tech. But aside from the typical fines and government subpoenas, chances are Facebook will continue to keep humming along — and pushing the envelope — for the foreseeable future.
Microsoft — Leader
Old-school tech stock Microsoft Corp. MSFT, +0.59% has been reborn over the last five years or so, with shares skyrocketing 250% since its 2014 lows while the S&P 500 is up less than 50% or so in the same period — including a big run in the last few weeks that makes it one of the sector’s top performers in 2019.
That’s because CEO Satya Nadella pushed Microsoft back into growth mode with a pivot to recurring subscriptions for its suite of popular software, such as Office, as well as a best-in-class cloud-computing solution with its Azure arm. Sure, Amazon Web Services maintains a lead in the cloud, but there is plenty of room for competition and Microsoft is securely in the hunt as Azure is gobbling share from competitors like Google and International Business Machines Corp. ( IBM, +0.11% and going toe-to-toe with AWS.
And let’s not overlook Microsoft’s recent re-entry into hardware, with Surface tablets and laptops as well as its Xbox gaming console and HoloLens augmented reality headsets for business use.
The scale and enterprise chops of Microsoft, coupled with its more recent focus on next-gen tech, makes it a great mix of legacy revenue and future potential right now.
Throw in a rare Big Tech dividend and $85 billion in cash and investments, you get Apple-like stability but with more potential upside.
Netflix — Follower
While Netflix has fought back from its December lows, the streaming video icon has struggled mightily to revisit its highs from last summer. That’s because of a few factors, but chief among them a high-profile break with Walt Disney Co. DIS, -0.72% on the horizon as the entertainment giant launches its own streaming service, and Disney titles leave Netflix over the next year or so.
This exacerbates a persistent problem for Netflix, which has been its challenges with international profitability as domestic subscriber rolls plateau.
Case in point: In the first quarter, Netflix saw growth of less than 3% in its domestic paid customers that offer up a 34% profit margin and was almost wholly reliant on international growth, which delivered a margin of less than 9% across fiscal 2018 when you smooth out the peaks and valleys.
With a largely saturated U.S. market, a lack of overseas profits and fierce competition across the board, the stock has its share of challenges. And when you throw in a forward P/E ratio north of 60 and a price/sales of roughly 10, it is hard to justify chasing this streaming video player unless it quickly shows it has other tricks up its sleeve.
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