Big Tech’s rapid growth stuns Wall Street

After the world’s biggest tech companies boomed during the coronavirus pandemic, life was expected to gradually return to normal.

It certainly does not happen that way.

This week, Big Tech reported an increase in growth and profits that stunned Wall Street, providing strong evidence that the digital dependence imposed on large parts of the world’s population over the past year could have a lasting effect. .

These outsized numbers amount to a reset for the business world, some investors and technology analysts have said. According to this view, the great digital powers have consolidated their gains of the last 12 months and made themselves an even more indispensable part of work and personal life.

“It’s been an incredible season of tech reporting for the biggest of the greats,” said Jim Tierney, a fund manager at AllianceBernstein.

Big Tech’s increasingly disproportionate impact on business can best be summed up in double digits.

One is the combined revenue of Alphabet, Amazon, Apple, Facebook and Microsoft, which jumped 41% in the first three months of this year, to $ 322 billion. This indicates a rapid acceleration in growth that big tech companies haven’t seen in years, even as they have become some of the biggest companies in the world.

The other is the growth in corporate profits, which has been even more spectacular. The after-tax profits of the five countries soared 105% from the previous year, to $ 75 billion. Profit margins have risen sharply across the industry as larger companies have benefited from economies of scale while keeping a cautious eye on cost expansion during the pandemic.

Wall Street already had an appreciation for the defensive power of tech stocks, believing they are weathering the worst of the recession, Tierney said. Less understood until recent days, he added, was the fact that Big Tech is also on the verge of coming out of recession, as consumer and business activity increases on their digital platforms. .

It’s not even as if Big Tech’s latest performance was flattered compared to a weak quarter a year ago. All but Apple were growing over 10% before the pandemic hit, although their growth rates have slowed.

According to Gene Munster, investor at Loup Ventures, the spectacular financial performance revealed this week was a subtle shift in the role Big Tech platforms play in everyday life.

“Consumers used to appreciate choice, but what they value now is reliability,” he said. This has caused them to focus their attention and spending more on a handful of familiar and easy-to-use platforms like the iPhone, Google’s search engine and Facebook’s Instagram, he added. habits that became deeply entrenched when screens came to play a central role. participates in all facets of life.

Whatever the reason, the first anniversary of the pandemic has been marked by a leap in both activity and monetization on the biggest digital platforms. Barring a reversal when the world reopens, that has set a new, higher bar for tech companies to measure.

“The question is, what is the height of the new plateau?” said Brian Wieser, head of business intelligence at GroupM, which is part of the WPP advertising group. “It’s definitely higher than what we expected two weeks ago.”

Stock prices skyrocket amid pandemic

The outstanding performance of the first quarter can be clearly traced in a handful of areas. Digital advertising, which has made regular inroads into traditional forms of commercial messaging for years, has taken a leap forward.

The most widely used cloud and mobile platforms, from the iPhone to Amazon’s cloud services, have seen a new explosion in activity. And some leading tech companies have capitalized on the heavy use of their platforms to stage a foray into a wider range of highly profitable services.

“Before the pandemic, we were seeing a deceleration in the growth of digital advertising – but the pandemic has juggled a lot of things,” Wieser said. Brand owners have developed a new appreciation for digital advertising during the pandemic as they have become more reliant on online sales, he added, while the many new businesses formed over the past year have grown. are naturally turning to online channels to find a market.

Google and Facebook each recorded their strongest ad growth in years, with Google’s ad revenue increasing 32% and Facebook’s increasing 46%. The jumps come against a backdrop of recovery for global advertising markets – although they far exceed the 10% rebound expected for the industry as a whole this year, according to GroupM.

The time and money consumers are now willing to spend on their most important gadgets, meanwhile, has been seen in a 66% jump in Apple’s revenue from the sale of iPhones. Even the declining PC market saw a strong rebound as unit sales jumped by about a third in the first quarter, boosting Microsoft’s profits.

Margins have improved for large tech groups over the past year

By comparison, the steady expansion of cloud computing platforms operated by Amazon, Microsoft and Google, which have become a mainstay of enterprise IT services, has taken less headlines. But the rise of remote working, learning, and entertainment has allowed the three cloud operators to maintain the growth rates they were seeing around the same time last year – even as they grew much larger. important and that some of their customers were hit hard during the pandemic.

Meanwhile, tech companies have taken advantage of their close ties with millions of users to extend their reach deeper into some of the services provided on their platforms. Apple’s shift into services, once despised by Wall Street as an uninteresting margin of its gadgets, contributed to a rise in profits which took its gross profit margin to more than 42% – a break from the level of about 38% who had resisted. many neighborhoods.

At Amazon, meanwhile, the new services have transformed the company’s profit profile. That includes the growth of the Amazon Web Services cloud platform, as well as advertising – as evidenced by a 73% jump in the company’s “other income” category, which is mostly made up of ads, in the first quarter.

The result was a record quarterly profit for a company once known for its persistent losses. Amazon’s after-tax profit of $ 8.1 billion in the quarter was equivalent to the company’s net profit in its first 22 years of existence.

Amid the euphoria on Wall Street, concerns about a potential intervention by regulators to curb Big Tech’s power – and profits – were briefly forgotten. Stocks in all but Apple were at or very near all-time highs following the latest numbers.

There was little else to spoil the party. The end of the strong secular growth trends that raised Big Tech may be in sight for too many years, Tierney said. But he added, “How many years can Microsoft grow 50% in the cloud, and how many years can Google’s advertising continue to grow 30%?” There is no sign yet that they have hit the wall.

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