Google v Amazon

The tech giants may have driven the bull run, but AI, advertising and the cloud mean they still have plenty of road left.

Twenty years ago, it was oil and gas companies that sat at the apex of the stock market – these days, it’s the technology majors.

Since the stock market struck its mid-crisis low in 2009, the S&P 500 has risen by more than 300%. Yet the Nasdaq index, which is dominated by technology stocks, has risen by more than 500%. Indeed, even in the S&P 500, more than a quarter of the index is technology stocks; without them, the S&P 500 would have only risen around 230% over this period.1

For investors, that kind of rise sparks a narrative that technology stocks can’t have very far left to run – and may well be due a correction. Yet such a view also assumes that they’ve played all their cards.

“If I take a five-year view, there is still an enormous amount of opportunity for the three big platforms: Microsoft, Google and Amazon,” said Hamish Douglass of Magellan, manager of the St. James’s Place International Equity fund. “Microsoft is up five times since we bought it in 2014 and it’s now the largest [publicly-traded] company in the world, with a trillion-dollar capitalisation – yet we still think there’s opportunity ahead.”

Such a view might seem surprising. After all, Microsoft already dominates the software market for office workers. Can it really expect to achieve rapid growth in an area it has all but conquered already? The answer to that, says Douglass, lies not in long-established software and technologies, but in relatively undeveloped ones.

“Despite its scale, Microsoft grew its revenue at 16% last quarter,” he says. “The big opportunity in the future is as the world moves its computational power to the cloud. There’s probably about $60 billion of cloud infrastructure revenue at the moment but our assessment is there’s a total addressable market of over $1 trillion. And it’s really a race between three companies: Amazon Web Services, Microsoft Azure and Google Cloud Platform. Ten years from now, Microsoft’s Cloud business alone could be as large as Microsoft is today.”

Douglass likes all three companies but, when it comes to investing, he refuses to ignore price.

“Jeff Bezos is the greatest businessman in the world,” he says. “But Amazon is simply overvalued at the current time. We’d love to buy it one day if it ever made sense. For the moment, however, we’re invested in Google [via Alphabet] and Microsoft, but not Amazon.”

Friendship – monetised

As for social media, its enormous user base provides a very different set of moneymaking opportunities.

“Facebook  – a stock we hold – is still very early on in the monetisation process and, in advertising, the company has barely touched the video market, which has $250 billion of ad revenue outside China,” says Douglass. “Yet they’ve already got 100 million users on their Watch platform for video and they’re now integrating Facebook Messenger, Instagram and WhatsApp to become commerce and payment platforms.”

Facebook is also just beginning to target online shopping, and Douglass argues the multi-trillion-dollar market provides it with a huge opportunity.

“Facebook has seven million advertisers – no media company has ever had that,” says Douglass.

Spies, and the ultimate prize

Yet with opportunities come dangers, and the tech majors have already become the target of angry consumer groups and eager regulators alike. Moreover, their huge stores of data and access to the most advanced technology give them enormous power and access. Like it or not, they have become an integral part of great power politics too. As a result, cyber espionage is now a major security concern worldwide.

“We have Mike Morell, former deputy director of the CIA, advising us and the cyber espionage threat is very real, with the potential for China or Russia to steal crucial data,” he says. “It’s going to get even worse with 5G but, already, the US, Britain, Iran and others have infiltrated most of the infrastructure worldwide. If they really wanted to, America could take down the whole of Russia’s utilities and vice versa. They kind of cancel each other out in that respect, like the nuclear threat, meaning the real worry is terrorist groups.”

When it comes to countries, however, technology is not merely important – it is fundamental to their place in the world. At the forefront of this digital arms race, Douglass argues, is artificial general intelligence, by which computers really could make decisions like humans.

“There are two major players – Alphabet is the private sector leader and the second big player is China, as Beijing is effectively integrating all its private sector players and the government into one big unit, with massive resources behind their artificial intelligence – commercial and military intelligence,” he says. “Whoever gets to artificial general intelligence has kind of won.”

In short, the tech majors may have come far – but they still have much, much further to go.

Magellan is a fund manager for St. James’s Place.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.

The opinions expressed are those of Hamish Douglass of Magellan as of May 2019 and are subject to change at any time due to changes in market or economic conditions. This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any strategy. The views are not necessarily shared by other investment managers or St. James’s Place Wealth Management.

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1 Source: Bloomberg

? S&P Dow Jones LLC 2019. All rights reserved.