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15th of October 2018

Economy



The tech giants are still in rude health

IN THE end, it wasn’t enough, at least for now. On July 31st Apple announced results for its third quarter that handily beat analysts’ expectations. Revenues rose by 17% compared with the same period in 2017, and profits were 32% higher. The firm’s shares jumped by nearly 4% in after-hours trading. But Apple did not, by the time The Economist went to press, quite manage to become the world’s first widely held listed company with a market capitalisation of $1trn (see chart).

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The near miss is a fitting coda to the latest round of results in techland. Momentum in this most upwardly mobile of industries is unbroken; sales and profits are still rising. But the laws of economic gravity have not been repealed. In fact, the era of the FAANGs— as Facebook, Amazon, Apple, Netflix and Google’s parent, Alphabet, are collectively known—may be coming to an end, giving way to a period in which two groups of tech firms follow different trajectories.

This year the FAANGs and a few other high-flying tech firms provided more than half the returns in the S&P 500 share index. Netflix’s share price, for instance, more than doubled between January and July. Twitter’s almost did so. Facebook’s market value quickly recovered from a low in March, after revelations that its data on 87m users had leaked to a British political-campaign firm.

With their shares priced for near-perfect results, the firms were vulnerable to bad news. This duly arrived, starting with Netflix, a video-streaming service, which said in mid-July that it had added fewer subscribers than expected. A few days later Facebook gave downbeat guidance about future growth and margins. Then Twitter, a microblogging site, announced that its number of active users had declined. All three firms’ share prices plunged by about a fifth.

News of the wipeout overshadowed the fact that the other tech titans continue to do well, as also evidenced in July. Microsoft, the world’s biggest software firm, reached $100bn in annual revenue for the first time. Alphabet shrugged off the $5bn fine recently imposed on it by European trustbusters and posted strong results. Amazon announced a record quarterly profit.

These diverging results point to a broader development. Throwing all the FAANGs and other big tech firms into one basket has always been lazy. In the future they will probably be seen as two different groups: a consumer-oriented one, which could, somewhat awkwardly, be called “FATWIN” (Facebook, Twitter and Netflix) and a more business-to-business group, which some already dub “MAGA” (Microsoft, Amazon, Google and Apple).

The first group shows signs of reaching maturity. It is not that the firms will now stagnate. Facebook’s revenues grew by 42%; Twitter’s were up by 24%. But signs abound that social media’s best days are over. Advertising revenues are not infinite. Users are exhibiting social-media fatigue. And regulators will continue to prod firms to police their platforms (one of the reasons for Facebook’s shrinking margins is that it has been hiring thousands of moderators to vet users’ posts). The firm’s earnings call should be seen as a “big reset of investor expectations”, says Mark Mahaney of RBC Capital Markets, a bank.

The second group benefits from the fact that companies continue to embrace cloud computing, particularly as it starts to encompass artificial-intelligence services. Amazon’s record profits were generated by its cloud-computing arm, as were Microsoft’s expanding revenues. Google, too, is making more money from the cloud, although it still depends on advertising as its main engine. As for Apple, being mainly a hardware-maker, it stands apart. Although it did not ship as many iPhones as expected, it sold them at a higher average price. Its services business, which includes the iTunes music store and the iCloud bundle of offerings, had its best quarter ever, posting revenues of nearly $10bn.

Overall, tech firms will continue to thrive, says Brian Wieser of Pivotal Research. Yet all bets will be off should America’s trade war with China continue to get hotter. Apple is most vulnerable. Not only are most of its devices made in China, but the country is its second-largest market. If Apple gets hit by tariffs, another company is likely to get to $1trn first. But right now, that prize seems within its reach.

Note (August 2nd, 2018): Apple breached the $1trn mark on August 2nd, after we went to press.

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