Interactive Investor

Why Apple and Amazon rule US tech stocks

13th August 2020 09:40

Richard Hunter from interactive investor


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Many say the tech giants are overvalued, but investors keep backing both brands.

The half-year reporting season happily contained some positive earnings surprises – admittedly based on some low expectations – and nowhere has continued to shine like the technology sector and big tech in particular. 

The main US indices have continued their differing performances – the Dow is down 3% in the year to date, the S&P 500 recently moved into positive territory, up 3%, but the technology-laden Nasdaq continues to power ahead, up 20% so far this year.

Arguably the real stars of the show have been a resurgent Apple (NASDAQ:AAPL) and also Amazon (NASDAQ:AMZN).

Apple shares are up 53% so far this year and 101% since the March lows, with the company now valued at $1.9 trillion (£1.46 trillion).

In its recent update, it reported an 11% gain in quarterly sales to $59.7 billion, fuelled by demand for its products and services as consumers worked and schooled from home under pandemic lockdowns. 

iPhone and iPad sales rose by 22% and 31% respectively. Revenues for services including music increased by 15% to $13.2 billion. On a geographical basis, sales increased in every region, including by 2% in Greater China. International sales accounted for 60% of total revenues.

In tandem with the results, Apple also announced a four-for-one stock split to make the shares more accessible to a broader base of investors. The split will take place in August. 

A record base of active installed devices is allowing Apple's Services business, which includes Apple Music, to blossom. Services now account for around 22% of overall sales, up from 21% this time last year. The launch of its AirPods Pro and a push to diversify its product sales also appears to be showing promise. Sales for wearable, home and accessories grew by 17% to $6.45 billion.

For investors, concerns over what might take up the slack from a broader slowing in iPhone device sales persists. Increasing government interest in the dominant positions of tech giants is also worth remembering, including the question of where the likes of Apple pays its taxes. But Covid-19 appears to be further underlining consumers’ need for technology, while a group cash balance of over $190 billion and the potential for added shareholder returns cannot be overlooked. 

The figures are equally impressive at Amazon, whose shares have gained 70% in the year to date and 88% since the March lows, giving a market value of $1.6 trillion.

The company recently reported a 40% jump in second-quarter sales to $88.9 billion as consumers proved increasingly happy to use its services during pandemic lockdowns across many parts of the world.

And, despite over $4 billion of Covid-related costs such as Personal Protective Equipment (PPE) to help protect staff, earnings of $10.30 per share blew past analyst consensus estimates of $1.46 per share. 

Amazon online grocery sales tripled in the period compared with the second quarter last year. Grocery delivery capacity was increased by over 160% and the number of grocery pickup locations was tripled in order to help customers during the pandemic. 

Meanwhile, its cloud-computing data division, Amazon Web Services (AWS), reported revenues of $10.81 billion for the period, up 29% year over year, but a slight slowing from the 33% gain it reported in the first quarter.  

Amazon offers investors the chance to buy into a retail revolution. Often blamed for the demise of physical shopping outlets, the convenience that Amazon has brought to the shopping arena is evidenced by phenomenal growth. North America still generates by far the lion’s share of sales at 62%, followed by international at 26% and AWS at 12%. 

The increasing gaze of governments and their questions over the dominance of tech giants such as Amazon may be cause for concern. Amazon’s stock market value is eye-watering, yet a forward price/earnings (PE) ratio of over 150 implies that investors and analysts continue to anticipate much more growth. 

As with the other mighty US tech stocks, the debate about valuation is never far away, but Amazon is the retail market-leader and streets ahead of the rest - it's why investors keep buying. 

These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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