Is It Time to Buy Big Tech?
Zacks Investment Research | Jan 13, 2021 03:49AM ET
Investors are always advised to go into a trade with their eyes open, to do their homework and take only very calculated risks. It’s generally a good idea to play safe rather than make losses. That’s the only way to win in the stock market.
But what if the stocks you are considering are the talk of the town? What if you already know that they have a solid track record, that they’ve been growing by leaps and bounds over the last few years and that they’re expected to continue on that route?
In such cases, it really boils down to the valuation. And the secret that’s fueling this kind of growth.
The first of the stocks I’ve lined up to discuss today is Amazon AMZN , which is classified as a retail company, but which owes every bit of its success to the digital platforms it has set up, whether on the retail side or on the Internet infrastructure side.
The company has huge data centers that store every bit of information on every one of the people that use its platforms, so this data can be analyzed to create behavioral models. If you’re an Amazon user, you’ve probably bought things from Amazon several times, which means you’ve probably saved your repeat orders, your address, your payment information, etc. And if you’re a Prime subscriber, also your video and music preferences.
Amazon knows when you buy what and for what purpose, when you tend to watch movies or the time of the day you listen to music. You are a very detailed profile in those data centers and your every transaction or use of Amazon services helps Amazon know you even better. After a while, Amazon recognizes most of your needs and can offer meaningful assistance in choosing whatever you might be looking for, to your maximum satisfaction.
So it’s no wonder that this Zacks #2 (Buy) ranked company has grown revenue and earnings at a respective 28.04% and 85.35% over the last 5 years. Nor is it surprising that it is currently expected to grow earnings at 29.23% over the next 5 years.
But Amazon is part of the regulatory scrutiny that all the big tech companies are up against now. And its current expansion plans are a drag on results. While the first may be a concern, the second is a usual thing for a growth company, no matter how big it is.
The shares have been trading sideways for a while now, but with the holiday quarter earnings report right around the corner, we could be headed for a spike in the near term. Even if that doesn’t pan out, it’s worth remembering that Amazon is currently trading at 68.69X forward 12 months’ earnings, which is below its median level over the past year. So this may be a good time to buy the shares.
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Next, we have the social networking giant Facebook (NASDAQ:FB) FB , which has also grown by virtue of the very innovative platform that it created. Facebook’s WhatsApp acquisition added millions of users that it initially promised would be a separate platform and later decided to integrate. The company has also adeptly copied other innovations from Snapchat and others that would augment its basic function as a social network. It also kept adding things like Watch, Shops, a Gaming app, etc.
In the process, the company also successfully steered itself into a position where it could capture a lot of data that could be similarly analyzed. Since the platform is supposed to facilitate communication, Facebook was also able to capture relationship data that could generate further conversation and engagement.
Increased engagement of course means more revenue for Facebook, so the company has been able to grow its revenue and earnings by 37.42% and 36.42%, respectively, in the last 5 years. And it is also expected to grow earnings 18.48% over the next 5 years.
The shares of this Zacks Rank #2 company are back where they were in September and appear to be trending down. However, the company is expected to report a robust fourth quarter (estimates are up 55 cents, or 20.8% in the last 60 days). The most recent estimate is also higher than the Zacks Consensus Estimate, so there are pretty strong chances of a positive surprise. And that usually leads to upside.
Especially when the shares are trading at a forward earnings multiple of 23.71X, placing them below their median value over the past year.
Let’s take a look at Alphabet (NASDAQ:GOOGL) GOOGL next. The company quickly grew from inception into the largest search engine in the world. When mobile phones came into existence, it found an effective strategy of expanding into those by giving away the Android operating system to hardware makers who were willing to install its software package.
Since this kept prices down and helped volumes, it was viewed as a win-win. Thus Google, now Alphabet, was ensured that it remained an integral part of our lives.
In addition to search queries, which are a very good way to capture data, the company branched off into many more things, spanning video, music, gaming, hardware, etc. Over time, it got to know us better and better, so it too could create the kind of profiles that could increase people’s reliance on it and thereby, perpetuate its growth.
As a result, the Zacks Rank #2 company could generate revenue and earnings growth of 20.47% and 21.02%, respectively in the last 5 years. It is currently expected to grow its earnings by 16.93% over the next 5 years.
Its current quarter earnings estimate jumped by $1.90 sixty days ago, although it moved down a penny 7 days back. The most recent estimate is 8.77% higher than the Zacks Consensus, so there is strong possibility of upside when the company reports later this month.
However, GOOGL shares are trading sideways since November and are currently at a multiple of 27.62X. Since this is below the median level over the past year, snapping up the shares seems like a good plan.
I won’t go into Apple NVDA instead.
While NVIDIA doesn’t have the data capturing software platform, it has the hardware tech that’s imperative to facilitate much of the number crunching in those big data centers. Plus, it’s also in gaming platforms and automated vehicles, which makes it a solid stock for the future.
NVIDIA is also not embroiled in regulatory scrutiny across continents.
The Zacks Rank #1 (Strong Buy) company has grown revenue and earnings by 22.0% and 34.19%, respectively in the last 5 years and it is currently expected to grow 18.26% in the next 5. What’s more, both its quarterly and annual estimates are trending up.
As far as valuation is concerned, the shares are trading at 46.63X forward earnings, which is well below their median levels over the past year. So this is a steal.
Final Words
The first three tech giants I discussed are slated to grow for years to come, simply because they are riding on free fuel. The more they provide services, the more data they gather, the more artificial intelligence they have, the more effective they become and the more money they make. National boundaries are of minimal significance to them.
While being domiciled in one place, they are able to generate cash globally. They also attract the best tech brains, so it’s’ hard for everyone else to keep up. And they are so integral to our existence that we cannot think of functioning without them. NVIDIA is part of the same revolution although it is working in the back room.
This is a world where the big keep getting bigger. And you definitely want a share of all that.
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