US stocks are at record highs thanks to rising tech
Yet most of the tech giants are still attractively priced.
The Dow Jones Industrial Average, the broader S&P 500 Index and the tech-heavy Nasdaq Composite Index set record highs all through 2017 and into 2018.
The rise of so-called FAAMG stocks – Facebook, Amazon, Apple, Microsoft and Google (renamed Alphabet) – explains much of the increase in the US stocks indices. Over 2017, Apple rose 48%, Microsoft 40%, Amazon 56%, Facebook 53% and Alphabet (Class A) 33%, increases that helped the S&P 500 Index gain 19% last year.
The success of the tech giants, which are now among the largest listed companies by market capitalisation, is fanning talk that we are in the midst of a tech bubble similar to the dotcom bubble that peaked in 2000, when unproven business models, many losing money, were priced on often ridiculously optimistic projections. Many caution that a tech correction, even a crash, is coming.
While the tech giants are in regulator’s sights, some tech stocks might be overvalued and stock prices are notoriously turbulent in the short term, we think that many of the tech leaders are not overvalued, even after allowing for their recent share price gains and regulatory risks. The global tech leaders have bright long-term futures because each dominates an expanding – and profitable – sphere of the digital world.
Many attributes
Apple’s iOS and Alphabet’s Android are the leaders of the global oligopoly in mobile operating systems. While Apple sells devices, its products can be viewed as ‘subscription’ payments to access Apple’s iOS platform and ecosystem of services. Already more than 500 million people are iOS users and that number has recently been growing at a doubt-digit annual rate. iPhone sales are an annuity-like revenue stream because existing users replace their devices over time with the latest ones, and Apple enjoys a user retention rate of about 95%.
Alphabet through its Google arm has a near-monopoly on global search advertising in many developed countries. Alphabet has used the riches from search to invest in often-radical products and services in the hope it can build leading positions in potentially massive markets.
Three of these businesses stand out. The first is Maps because Alphabet can use the site to connect people to local businesses. Another is YouTube, which is poised to encroach on the US$150 billion spent on TV ads worldwide. The third is Google Cloud. Cloud infrastructure is a US$30 billion market now, but providing internet-based processing has the market potential to be worth US$1 trillion in coming years.
Facebook is like Alphabet in terms of an outstanding core business and promising peripheral ones. Facebook’s core social platform, with its more than two billion users, is a highly advantaged advertising business because Facebook is adept at building engagement and targeting ads. The other businesses, especially Messenger (one billion users) and WhatsApp (1.2 billion users), are yet to be turned into money-making machines but these both have the potential to earn vast sums.
Microsoft dominates key segments of the business-software and data-centre markets. It has high customer retention rates and enjoys sustainable earnings growth as a result. While these markets are seemingly mature, the advent of cloud computing means that the software markets enjoy great potential.
Growth drives value
Investing largely comes down to what someone is prepared to pay for future earnings. But the most quoted valuation measures can often be misleading.
Apple, for instance, trades at a modest discount to the price-earnings multiple of the S&P 500 Index. However, when you adjust for its large cash balance and the high-growth services and wearables business (which deserve a higher multiple on a standalone basis), the implied multiple for the ‘core’ iPhone business is a significant discount to the index. We estimate an implied one-year forward price-earnings multiple for the iPhone business of around 9.1 times compared with 20.0 times for the S&P 500 on 31 December 2017. It’s a similar story when you delve into the valuations of Alphabet and Facebook.
Speculation abounds about whether or not the US share market is overvalued. There are always risks to markets. But one thing we do not think investors should be overly concerned about is the risk that the leading global technology stocks are vastly overvalued.
The tech giants outpace the S&P 500 Index over 2017
Source: Morningstar.
Important Information: This material has been prepared by Magellan Asset Management Limited (‘Magellan’) for general information purposes and must not be construed as investment advice. This material does not constitute an offer or inducement to engage in an investment activity nor does it form part of any offer or invitation to purchase, sell or subscribe for in interests in any type of investment product or service. This material does not take into account your investment objectives, financial situation or particular needs. You should read and consider any relevant offer documentation applicable to any investment product or service and consider obtaining professional investment advice tailored to your specific circumstances before making any investment decision. This material and the information contained within it may not be reproduced or disclosed, in whole or in part, without the prior written consent of Magellan. Any trademarks, logos, and service marks contained herein may be the registered and unregistered trademarks of their respective owners. Nothing contained herein should be construed as granting by implication, or otherwise, any licence or right to use any trademark displayed without the written permission of the owner.
Statements contained in this material that are not historical facts are based on current expectations, estimates, projections, opinions and beliefs of Magellan. Such statements involve known and unknown risks, uncertainties and other factors, and undue reliance should not be placed thereon. Additionally, this material may contain “forward-looking statements”. Actual events or results or the actual performance of a Magellan financial product or service may differ materially from those reflected or contemplated in such forward-looking statements.
Certain economic, market or company information contained herein has been obtained from published sources prepared by third parties. While such sources are believed to be reliable, neither Magellan or any of its respective officers or employees assumes any responsibility for the accuracy or completeness of such information. No person, including Magellan, has any responsibility to update any of the information provided in this material.
Magellan offers two market-leading strategies, global equities and global listed infrastructure. Find out how easy it is to invest in the world’s best companies, as chosen by Magellan’s experts.
Global equity products
You buy from the world’s best companies, so why not invest in them? Magellan offers a range of highly-rated global equity funds, containing some the world’s best companies that we believe are positioned to benefit from long-term investment tailwinds.
Infrastructure: Supporting you every minute of every day. Our range of top-rated global listed infrastructure funds are positioned to generate inflation-protected, stable yet solid returns.
By clicking “I Agree” you represent that you are a ‘wholesale client’ under section 761G of the Corporations Act 2001 (Cth) (the “Act”). Further, you represent that you will not directly or indirectly disseminate information contained on this website to a ‘retail client’ within the meaning of section 761G of the Act.
This website contains general information only and does not take into account any person’s investment objectives, financial situation or needs. Nothing contained in the website constitutes a solicitation, recommendation, endorsement or offer to buy or sell any securities or other financial instruments.
Important Legal Information: The information contained in the Institutional section of this website is not intended to constitute:
any offer for sale or subscription of securities to the public in New Zealand in terms of the Securities Act 1978 of New Zealand (the 1978 Act) (or any statutory modification or re-enactment of, or statutory substitution for, the 1978 Act). Accordingly, no prospectus or investment statement for the purposes of the 1978 Act has been produced in respect of the information contained in the website and the information does not contain all the information typically included in a registered prospectus or an investment statement under the 1978 Act; or
the provision of "financial advice" under the Financial Advisers Act 2008 (the 2008 Act) (or any statutory modification or re-enactment of, or statutory substitution for, the 1978 Act).
By clicking "I agree," you agree that you have read the terms detailed below and confirm that:
1) you:
(i) are an "habitual investor" for the purposes of section 3(2)(a)(ii) of the 1978 Act. "Habitual investors" are persons whose principal business is the investment of money or who, in the course of and for the purposes of their business, habitually invest money; or
(ii) otherwise fall within one of the other categories set out in section 3(2)(a) of the 1978 Act, meaning that you are not a member of the public for the purposes of the 1978 Act; or
(iii) you are acting for a person described in (i) or (ii); and
2) you are a "wholesale client" for the purposes of the 2008 Act.
The information contained in the Institutional section of this website is intended only for institutions that are both (i) habitual investors or otherwise fall within one of the other categories set out in section 3(2)(a) of the 1978 Act and (ii) "wholesale clients" under the 2008 Act. Such persons shall be referred to as "institutional investors" herein. Persons who are not institutional investors should not review the information contained in the website. This website is supplied on the condition that it is not passed on to any person who is not an institutional investor.
Nothing on this website constitutes investment, legal, business, tax or any other type of advice. The information on this website does not take into account the particular financial and investment objectives, circumstances and needs of any person. Information on the website is not intended for investors in any jurisdiction in which distribution or purchase is not authorized.
Performance data shown represents past performance and is no guarantee of future results. Investment return and principal value fluctuate so your investment, when sold, may be worth more or less than the original cost; current performance may be lower or higher than quoted. Investors should be aware of the increased risks associated with investments in foreign/emerging markets securities, high yield securities and smaller companies.You are solely responsible for evaluating the risks and merits regarding the use of the website and any services provided within. Nothing contained in that website constitutes a solicitation, recommendation, endorsement or offer to buy or sell any securities or other financial instruments.
Important Legal Information: By clicking "I agree," the user agrees that I have read the terms detailed below and confirm that I am an Institutional Investor and that I wish to proceed.
Information contained in the Institutional section of this website is not intended for institutional investors in any jurisdiction in which distribution or purchase is not authorised.
The information is intended for institutional investors and consultants to institutional investors and is published for informational purposes only. The information is directed at informing persons falling within one or more of the following categories:
1) A government, local authority, or public authority;
2) A bank or insurance company;
3) A pension fund or charity;
4) An individual who is a "qualified client" under the Investment Advisers Act of 1940 and has experience in investment, financial and business matters to evaluate the risks of investing in securities;
5) Persons whose ordinary activities involve or are reasonably expect to involve them, as principal or as agent, in acquiring, holding, managing or disposing of investments for the purpose of a business carried on by them;
6) Persons whose ordinary business involves the giving of advice, which may lead to another person acquiring or disposing of an investment or refraining from so doing.
Persons who do not fall into one of the above categories should not review the information contained in this site.
Performance data shown represents past performance and is no guarantee of future results. Investment return and principal value fluctuate so your investment, when sold, may be worth more or less than the original cost; current performance may be lower or higher than quoted. Investors should be aware of the increased risks associated with investments in foreign/emerging markets securities, high yield securities and smaller companies.
Important Legal Information: By clicking "I agree," the user agrees that I have read the terms detailed below and confirm that I am an investment professional as that term is defined in the Handbook of the Financial Conduct Authority ("FCA") or that I am acting for an investment professional.
Information contained on the Institutional section of this website is not intended for investors in any jurisdiction in which distribution of the information or purchase is not authorized or permitted.
The information is exclusively intended for, and directed at, investment professionals and advisers to investment professionals. Any products and investment services that are referenced on this website are only available to, or will only be engaged in with, investment professionals. Investment professionals will usually fall within one or more of the following categories (terms used have the same meaning as in the FSA handbook):
1) An authorised person;
2) An exempt person;
3) A government, local authority (constituted in any jurisdiction) or an international organisation;
4) Any person whose ordinary activities involve him in carrying on an investment activity;
5) A person who is acting in their capacity as a director, officer or employee of the above.
Persons who do not fall into one of the above categories, or who do not otherwise constitute investment professionals, should not read or rely on the information contained on this website.
The information provided on this website is for information purposes only and nothing on this website constitutes investment, legal, business, tax or any other type of advice.
Any performance data shown represents past performance. Past Performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. Investment return and principal value fluctuate so your investment, when sold, may be worth more or less than the original cost; current performance may be lower or higher than quoted. Investors should be aware of the risks associated with investments generally and the increased risks associated with investments in foreign/emerging markets securities, high yield securities and smaller companies.
Important Legal Information: By clicking "I agree," the user agrees that I have read the terms detailed below and confirm that I am an "Accredited Investor" and that I wish to proceed.
Information contained in the Institutional section of this website is not intended for accredited investors in any jurisdiction in which distribution or purchase is not authorized.
The information is intended for accredited investors and consultants to accredited investors, and is published for informational purposes only.
The term "Accredited Investor" is a defined term under the Canadian Securities Regulation and includes Institutional Investors, such as banks, insurance companies, trust and loan companies, and pension plans. It also includes individuals provided they meet certain net worth or income thresholds. For more information, refer to National Instrument 45-106 of the Canadian Securities Administrators or consult your legal adviser.
Persons who do not fall into the definition above should not review the information contained in the site.
Performance data shown represents past performance and is no guarantee of future results. Investment return and principal value fluctuate so your investment, when sold, may be worth more or less than the original cost; current performance may be lower or higher than quoted. Investors should be aware of the increased risks associated with investments in foreign/emerging markets securities, high yield securities and smaller companies.
Important Legal Information: By clicking "I agree," the user agrees that I have read the terms detailed below and confirm that I am an "Institutional Investor" and that I wish to proceed.
Information contained in the Institutional section of this website is not intended for institutional investors in any jurisdiction in which distribution or purchase is not authorized.
The information is exclusively intended for, and directed at eligible counterparties or professional clients as defined under the German Securities Trading Act. For more information, consult your legal adviser.
Nothing on this website constitutes investment, legal, business, tax or any other type of advice. The information on this website does not take into account the particular financial and investment objectives, circumstances and needs of any person. Information on the website is not intended for investors in any jurisdiction in which distribution or purchase is not authorized.
Performance data shown represents past performance and is no guarantee of future results. Investment return and principal value fluctuate so your investment, when sold, may be worth more or less than the original cost; current performance may be lower or higher than quoted. Investors should be aware of the increased risks associated with investments in foreign/emerging markets securities, high yield securities and smaller companies.
You are solely responsible for evaluating the risks and merits regarding the use of the website and any services provided within. Nothing contained in that website constitutes a solicitation, recommendation, endorsement or offer to buy or sell any securities or other financial instruments.
Important Legal Information: By clicking "I agree," the user agrees that I have read the terms detailed below and confirm that I am an "Institutional Investor" and that I wish to proceed.
Information contained in the Institutional section of this website is not intended for institutional investors in any jurisdiction in which distribution or purchase is not authorized.
The information is intended for institutional investors and consultants to institutional investors, and is published for informational purposes only. The information is directed at non-retail clients falling within one or more of the following categories:
1) A government, local authority or public authority;
2) A bank or insurance company;
3) A pension fund or charity;
4) An individual who provides one or more investment services on a professional basis;
5) Persons whose ordinary activities involve or are reasonably expect to involve them, as principal or as agent, in acquiring, holding, managing or disposing of investments for the purposes of a business carried on by them;
6) Persons whose ordinary business involves the giving of advice, which may lead to another person acquiring or disposing of an investment or refraining from so doing.
Persons who do not fall into one of the above categories should not review the information contained in the site.
Performance data shown represents past performance and is no guarantee of future results. Investment return and principal value fluctuate so your investment, when sold, may be worth more or less than the original cost; current performance may be lower or higher than quoted. Investors should be aware of the increased risks associated with investments in foreign/emerging markets securities, high yield securities and smaller companies.
Important Legal Information: By clicking "I agree," the user agrees that I have read the terms detailed below and confirm that I am an "Institutional Investor" and that I wish to proceed.
Information contained in the Institutional section of this website is not intended for institutional investors in any jurisdiction in which distribution or purchase is not authorized.
The information is exclusively intended for, and directed at institutional investors, accredited investors and expert investors as defined under the Securities and Futures Act (Singapore) (“SFA”) For more information, refer to the SFA or consult your legal adviser.
Nothing on this website constitutes investment, legal, business, tax or any other type of advice. The information on this website does not take into account the particular financial and investment objectives, circumstances and needs of any person. Information on the website is not intended for investors in any jurisdiction in which distribution or purchase is not authorized.
Performance data shown represents past performance and is no guarantee of future results. Investment return and principal value fluctuate so your investment, when sold, may be worth more or less than the original cost; current performance may be lower or higher than quoted. Investors should be aware of the increased risks associated with investments in foreign/emerging markets securities, high yield securities and smaller companies.
You are solely responsible for evaluating the risks and merits regarding the use of the website and any services provided within. Nothing contained in that website constitutes a solicitation, recommendation, endorsement or offer to buy or sell any securities or other financial instruments.
Important Legal Information: By clicking "I agree," the user agrees that I have read the terms detailed below and confirm that I am a "professional investor" as defined under the Securities and Futures Ordinance of Hong Kong (the “Ordinance”) and any rules made under the Ordinance, and that I wish to proceed.
Information contained in the Institutional section of this website is not intended for institutional investors in any jurisdiction in which distribution or purchase is not authorized.
The information is exclusively intended for, and directed at, professional investors as defined under the Ordinance and any rules made under the Ordinance or as otherwise may be permitted by the Ordinance. For more information, refer to the Securities and Futures Commission of Hong Kong or consult your legal adviser.
Nothing on this website constitutes investment, legal, business, tax or any other type of advice. The information on this website does not take into account the particular financial and investment objectives, circumstances and needs of any person. Information on the website is not intended for investors in any jurisdiction in which distribution or purchase is not authorized.
Performance data shown represents past performance and is no guarantee of future results. Investment return and principal value fluctuate so your investment, when sold, may be worth more or less than the original cost; current performance may be lower or higher than quoted. Investors should be aware of the increased risks associated with investments in foreign/emerging markets securities, high yield securities and smaller companies.
You are solely responsible for evaluating the risks and merits regarding the use of the website and any services provided within. Nothing contained in that website constitutes a solicitation, recommendation, endorsement or offer to buy or sell any securities or other financial instruments.
Thank you for your interest. We are committed to expanding our institutional website to meet the needs of our global investor base. We do not, however, have content approved for your location at this time. For additional information please email institutional@magellangroup.com.au
Important Information
This document does not constitute an offer of units in a Magellan Fund in any jurisdiction other than Australia or New Zealand (or in jurisdictions where it is lawful to make such an offer). Applications for units in a Magellan Fund from residents outside of Australia and New Zealand may not be accepted.
By clicking on the "I Confirm" button below you are confirming that you are a resident of Australia or New Zealand (or that you are acting on behalf of a person who is a resident in one of those jurisdictions).
