Will Google, Meta and other Big Techs always grow?
Big Techs such as Meta, Alphabet and Apple will have to reshape their strategies to continue growing and guarantee adequate margins for investors. All the data and advice from the Economist
Is Big Tech still synonymous with unlimited growth? A recent study by the Economist goes into the merits of the record results collected on the stock exchange and in the markets by digital giants such as Meta , Alphabet and Apple , predicting an imminent end of the manna and the opening of a new phase of uncertainty in which Big Tech will have to reformulate its strategy to still ensure adequate margins for investors. Here is the analysis of the Economist and the three ways suggested by the magazine to try to navigate in the future.
Big Tech's Eldorado
After the sharp declines of 2022, Big Tech is roaring again this year. Last week Alphabet, Meta and Microsoft all announced strong second-quarter results, after also posting record profits in the first. Between January and June, the three companies combined reported $106 billion in profits, or $9 billion more than in the same period last year. Meanwhile, the stock prices of the Big Five are returning to their 2021 peaks.
According to the Economist , these extraordinary results pose a problem that refers to a factor such as their own size: how can these giants kissed by fortune and by the markets maintain these growth rates? This will be, according to the British economic newspaper, the challenge of the digital giants in the years to come.
Matter of arithmetic
It is, if you like, a simple matter of arithmetic. Alphabet, Amazon, Apple, Meta and Microsoft dominate the S&P 500 stock index accounting for 9% of its sales, 16% of its net profits and 22% of its market capitalization. Their capital spending last year, amounting to $360 billion, represented one-tenth of all investment by American private companies.
It is precisely their constant and sustained growth that makes Big Tech unique in the history of capitalism. When ExxonMobil and General Electric were at their peak at the end of the last century, their revenues were growing at an average annual rate of 5-6% and their profits at 5-10%. The digital titans have been growing 16% and 13% respectively for a decade now.
If Alphabet's sales growth continues at its current rate of 28%, it should post $86 billion in additional sales next year, which is more than all 461 of the smaller companies listed in the S&P 500 combined combined. Last year. For their part, if they were to maintain their historical growth rate, Apple and Alphabet would earn an extra 25 billion dollars next year.
To maintain this trend in the long term would perhaps be asking too much. Yet that is exactly what administrators and investors are aiming for. So what's the way?
The three ways of the Economist
For the Economist , there are three ways forward. The first is what we would call downsizing . In other words, it is a question of partially reducing one's ambitions, cutting costs and non-core projects and thus protecting one's profit margins. Big Tech actually seems to be heading in this direction, as demonstrated by the 70,000 jobs eliminated this year by all Big Tech companies excluding Apple. Or the abandonment of some physical stores by Amazon.
The second way passes through concentration in one's core business. It is in this sense that both Microsoft and Google and Meta are engaged, who are focusing their attention on their applications implemented by generative AI.
But the most ambitious way to maintain one's growth levels is to look for new markets. Big Techs are already doing it by cannibalizing each other, i.e. trying to tap into the competitor's user base. For example, Alphabet has decided to challenge Amazon and Microsoft in cloud computing. For their part, Amazon and Microsoft have begun to focus on the advertising market, while Apple launched its virtual reality viewer in June with which it intends to compete with Meta.
Navigate in uncertainty
None of these routes are without risk. A weight-loss diet usually only guarantees profits for the first two years, and comes at the expense of future income. Big Tech's top markets – whether it's iPhones, online advertising or enterprise software – no longer experience astonishing growth rates of 20% or more. And embarking on a Darwinian competition does bring new revenues but squeezes margins.
The conclusion for the Economist is simple and comes in the form of advice to investors and CEOs alike: get used to it and prepare for a period of uncertainty because the days of the gold rush are over.
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/innovazione/big-tech-crescita-illimitata-economist/ on Sat, 19 Aug 2023 05:44:30 +0000.