For information purposes only. The views and opinions expressed here are those of the author at the time of writing and can change; they may not represent the views of Premier Miton and should not be taken as statements of fact, nor should they be relied upon for making investment decisions.
There have been some genuine innovations around technology, such as the internet, mobile technology and, more recently, artificial intelligence. In short, the software and the hardware, and how they are combined. However, it’s much more than this which has propelled big tech to where it is in terms of its importance in economic, social, political and market capitalisation terms.
Unusually low interest rates provided vital access to cheap capital at a time when these companies were growing, needed to invest in R&D and, in many cases, it allowed the acquisition of potential competitors. Additionally, low rates have contributed to the growth in market capitalisation, as future profits have been discounted back at lower discount rates and supported valuations.
Linked to that, big tech has also benefited from the massive growth of passive investing, a practice which focuses on market capitalisation rather than profit per se, especially important in the early days when profits were sparse. In addition, big tech’s tendency for significant share buybacks has provided a fairly consistent bid for share prices.
More recently, lockdown benefited many of these companies, as nations went on-line. In more recent years, many of these companies turn a massive profit and here they frequently benefit from opaque tax structures, tax havens and creative accounting practices. In terms of regulations more generally, legislators are often catching up, as tech progress has been so fast moving.
Another element which has powered their growth is quite distinctive: many users end up working for the business but are unwaged. For example, users that create and share content, traffic information uploaded when using navigation apps, etc. Not only are they unwaged but they contribute to something else, which is not unique to tech, called the network effect: the more members join, the better the experience and the more valuable the business becomes to users, and shareholders.
There is a debate around whether or not these companies are in fact monopolies, some are clearly more so than others. They have sometimes avoided accusations of monopoly as they are offering cheaper, or optically free, services or demonstrably better services, e.g. faster delivery. In addition, monopolies are often accused of stifling innovation and, while that may well be true, it’s also easy to argue that these companies are also innovating, even if they are smothering competition in some cases too.
Either way, whether they are monopolies or simply big conglomerates, they benefit from many advantages typical of monopolies, for example, from economies of scale, high barriers to entry and their lobbying power.
Rightly or wrongly, monopolies have always used their power for their benefit and in some way it will be no different here, except they have an additional power, that of information and communication. In this way, their influence is often very powerful. It’s not listed but just look at the importance of the Elon Musk owned Space-X Starlink satellite communications in Ukraine. More generally, there is a risk to democracy with the algorithmic nature of information generation and information gathering.
In summary, there are some amazing positives, but negatives too, brought by big tech, which are confusing for regulators and investors alike. The top of big tech has been called by many investors many times. Our regular readers know that is not our style, however, some factors that have benefited big cap are starting to change. For a start, higher interest rates are starting to lead to better capital discipline. This can be seen amongst the Mag 7, where investors are starting to discriminate more, with these stocks not moving like a block under the halo of artificial intelligence, as they did last year.
From our perspective, we like many of the businesses in this space, let’s not forget that the Mag 7 has accounted for the vast majority of market profits in the last few years, and many of them have a positive momentum to their share price. That said we do worry about concentration risk, so we own a basket of stocks, rather than big positions in individual stocks.
