Back In Vogue

Big Tech stocks have been losing ground to cheap-looking “cyclical” stocks lately, but expectation-busting earnings proved they’re still very much in fashion.


🕰 Recap

  • In January, Netflix kicked off Big Tech’s earnings and posted better-than-expected results.
  • …followed by Apple and Facebook, which both announced results that beat analysts’ estimates.
  • …and Microsoft’s earnings lived up to expectations too.
  • On Tuesday, Alphabet reported its own better-than-expected results.
  • And last but by no means least, so did Amazon.


✍️ Connecting The Dots

Three trends have driven the surge in demand for Big Tech’s products and services over the past year. For one, the demand for home entertainment, which saw both Netflix and Facebook announce more subscribers and active users respectively than expected. Microsoft Xbox sales also soared past analysts’ estimates. For another, the working-from-home boom, which has played right into the hands of Microsoft, Amazon, and Google-parent Alphabet’s cloud computing businesses. And finally, the rise of ecommerce, which sent Amazon’s retail business to new heights.

There have been a couple of surprises along the way too. Amazon founder Jeff Bezos announced he’d be stepping down as CEO and taking on the role of executive chair later this year. That’s no doubt raised questions about the company’s future – and might be why its shares stayed put in defiance of expectation-busting earnings.

Alphabet, meanwhile, disclosed its cloud segment’s profitability for the first time. Or rather lack of it: it’s still not making money, which suggests it has some way to go before it catches up with frontrunners Amazon and Microsoft. And to top it off, Netflix said it’s making enough cash to fund its own day-to-day operations. The streaming giant even mentioned that it’s likely to buy back its own stock – a move that would push up its share price.


🥡 Takeaways

1. Big Tech stocks are back, but some have more potential than others.

Big Tech stocks have underperformed the US stock market over the last three months: they’re not expected to benefit from the economic recovery as much as “cyclical stocks”, which tend to move in line with the economy. But when Netflix kicked off earnings season with better-than-expected results in January, it might’ve reminded investors what a good thing they had going – and they’ve been piling back into tech stocks ever since. That does mean they’re looking quite pricey right now, mind you, which is why it might be worth looking at some under-the-radar areas – namely, Big Tech’s suppliers.


2. Home entertainment’s proving to be a reliable market.

One of the world’s biggest investment management firms thinks digital entertainment is now so essential that it’s considered a consumer must-have, making some Big Tech companies the new defensive stocks. In other words, the likes of Netflix and Facebook will do well no matter how the broader economy’s holding up – which was more than could be said for traditionally defensive stocks last year, like utilities and consumer staples stocks.


🎯 Also On Our Radar

South Korean carmaker Hyundai-Kia is reportedly planning to manufacture Apple’s autonomous vehicles, and the news saw both companies’ shares jump. Apple’s “iCars” have been making the headlines in recent months, and investors have been getting excited. You can’t blame them: the development of autonomous vehicles isn’t happening as quickly as investors had hoped, so they’ll take what they can get.

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