Outlook for technology large caps following today’s news of Apple reaching a $2trn market cap

By Randeep Somel, Associate Portfolio Manager of the Equity Team at M&G Investments,

Randeep somel
Randeep Somel
Apple’s new milestone today reflects the progress of the FAANG stocks in recent years, as well as consumers’ increased focus and reliance on technology more recently since the outbreak of the pandemic. However, while this has been very positive for technology large cap technology companies, the future outlook for the sector is less clear. Most notably, the increasing size and influence of these companies has brought with it greater scrutiny from regulators. The ability of technology companies, all of whom are sitting on vast cash reserves, to buy out new/challenger technology companies going forward will not be as easy as it has been in the past.

The large cap technology stocks are falling under greater scrutiny of regulators, as shown by the US congressional hearings on antitrust in July this year. The CEOs of Facebook, Alphabet (Alphabet), Apple and Amazon were all remotely summoned to answer questions on the power of their companies ranging from use of data, pricing, and the treatment of smaller competitors. Technology platforms are very strong, but they have buttressed their positions by acquiring smaller competitors, such as Facebook’s acquisition of Instagram and Whatsapp. If there is greater scrutiny of large cap tech acquiring smaller companies going forward it will allow smaller companies to challenge and provide greater competition. As such, whilst the potential purchase of TikTok may also allow Microsoft to get footing in social media with an existing platform, an area that it has lacked relative to some of the other large cap tech companies, due to competition rules its main competitors would not want the public scrutiny of such an acquisition (Microsoft was not part of the congressional anti-trust hearings).

In terms of secular trends, the cloud/public computing businesses will continue to serve Microsoft (Azure) and Amazon (AWS) well. They are two companies that invested early and are now already seeing the benefits of scale. The longer office workers continue to work remotely from home, the increased likelihood we have that this becomes a more permanent fixture. This benefits cloud operators as companies scale down on-site presence (including own servers), and continue moving them to the cloud.

Picture studios releasing films to on-demand (and not exclusively) to cinema first will embolden the appeal of platforms such as Netflix and Amazon Prime. Although original content providers are producing their own direct to customer platforms such as Disney+.

The upcoming rollout of 5G will be a good opportunity for handset makers to refresh their products with new technology and provide a strong update cycle. This should benefit Apple.