April 19, 2021

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Big tech needs ‘next big thing’ amid pandemic, economic uncertainties – analysts

3 min read

Faced with an uncertain global economy and maturing core businesses, analysts say now is the time for cash-rich technology companies to explore new areas of growth.

For 2020, Alphabet Inc., Facebook Inc., Microsoft Corp. and Apple Inc. each reported tens of billions in liquid assets, including cash and cash equivalents, short-term investments and marketable securities. That said, many of the companies faced slowdowns in their core businesses ranging from advertising demand to smartphone sales. Looking out to 2021 and beyond, analysts urge large tech companies to allocate their cash toward emerging growth areas, such as cloud computing, virtual reality and autonomous driving, to stave off future economic risks.

In the just-ended quarter, Facebook and Alphabet noted improvements in advertising, which accounts for the bulk of their total revenue and was hit hard last year as businesses of all sizes cut costs amid the pandemic. Apple, meanwhile, reported record revenue in the same quarter that was largely driven by strong demand for its services and new 5G iPhones. Microsoft’s cloud and gaming businesses continued to benefit from a surge in pandemic-driven demand.

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“These companies have so much cash on hand and they’re so powerful,” said Daniel Morgan, a senior portfolio manager at financial service firm Synovus, in an interview. “But they’re all trying to find that next big thing.”

For Alphabet, Morgan expects the tech player to spend a good chunk of change on building out its cloud computing business to better compete against market leaders Amazon.com Inc. and Microsoft, while also strengthening its Other Bets unit, which notably includes its Waymo self-driving car business. Alphabet has plenty of dry powder to spend on such efforts. The tech player ended the December 2020 period with $136.69 billion in liquid assets, up from $132.60 billion in the September 2020 quarter. Microsoft followed with $131.99 billion.

For the first time ever, Alphabet in the December 2020 period broke up its cloud business, Google Cloud, as a separate reporting segment. Google Cloud posted a loss of $1.24 billion, compared to a loss of $1.19 billion a year ago, but revenues in the segment rose to $3.83 billion in the fourth quarter of 2020, up from $2.61 billion a year earlier.

Other Bets lost $1.14 billion in the fourth-quarter, compared to a loss of $2.03 billion in the same period a year ago. The segment posted quarterly revenues of $196 million, compared to $172 million in the fourth quarter of 2019.

Facebook, meanwhile, should focus on building out its virtual reality business, said Loup Ventures managing partner Gene Munster, who called the emerging technology Facebook’s “most potent and underappreciated innovation opportunity.”

The company in October 2020 launched its Oculus Quest 2 virtual-reality headset, which starts at $299 and comes equipped with QUALCOMM Inc.’s Snapdragon XR2 Platform processor. The device was “one of the hot holiday gifts” in the just-ended quarter and is “on track to be the first mainstream virtual reality headset,” Facebook CEO Mark Zuckerberg said on a January earnings call.

Facebook’s “other revenue” category, including everything besides advertising, jumped 156% year over year to $885 million in the December 2020 quarter, driven primarily by strong demand for its Quest 2 device, the company said.

“We’ve long speculated that FB’s earnings multiple will be pressured over time as investors increasingly value more innovative companies,” Munster said in a report. “Eventually, Facebook will need to return to innovation to yield share outperformance.”

Wedbush Securities analyst Daniel Ives is particularly bullish about Apple’s expected push into the electric vehicle market, calling the space a “trillion dollar opportunity” globally.

Reports swirled in recent weeks that Apple was nearing a partnership with South Korean automaker Hyundai Motor Company to manufacture its first-ever Apple Car electric vehicle, though Hyundai has since refuted those claims. Nonetheless, Ives believes it is a “matter of when not if” that Apple enters the budding market and assigned an 85% chance the company announces a partnership or collaboration with an automaker in the next three to six months.

As of the fourth quarter 2020, Apple reported holding $76.83 billion in liquid assets.

All in all, despite lingering pandemic-driven impacts and the fact that big tech’s bread-and-butter products and services continue maturing, the Wedbush analyst says big tech still has much room to grow.

“Our unwavering view is that tech stocks could have another 25%+ upward move in the cards for 2021,” Ives said.