There has never been a better time to buy big tech

This may sound repetitive, but the opportunity in Big Tech has never been better. The US quarterly reporting season has all but confirmed that the most important companies in the world remain in robust health.

That is, of course, with one small caveat; your definition of technology. The term Big Tech has come to encompass anything company that has a website or operates online, yet in my personal view, Big Tech really means that group of companies that are making people’s lives better and easier.

Having given up on the likes of Instagram, Facebook and Tik Tok in recent months, my definition of tech has narrowed to just two companies: Microsoft and Alphabet, Google’s parent company. Both are trillion-dollar companies, recently joined by Tesla in this rarified air, and both are showing few signs of slowing.

Before diving into the detail, it’s worth taking stock of the current valuation of these two companies, which many headlines suggest are grossly overvalued.

As it stands today, Microsoft trades on a forward price/earnings (P/E) ratio of 36 times and Alphabet 27 times. As a comparison, two of Australia’s better managed companies, being Woolworths and Wesfarmers, trade on multiples of 28 and 31 times. Sounds expensive, doesn’t it?

As is typically the case, the truth and opportunity lies below the surface, and despite the headlines low bond rates aren’t the only contributor to the valuation of these global leaders. In Microsoft’s latest quarterly report it delivered a 22 per cent increase in revenue to US$45 billion, which supported a 25 per cent increase in earnings.

This is an important lesson in relying solely on a single measure like the P/E ratio, as 2021 has seen very little expansion in earnings multiples, but rather a ‘catch up’ from the earnings component as Big Tech flexed its muscles.

CEO Satya Nadella said it best when highlighting that every type of business can improve its productivity, and the affordability of their products by “building tech intensity”. This is the powerful trend that has supported staggering growth in the last few years, and likely for decades to come, with cloud computing still barely scratching the surface globally. And this comes ahead of what is expected to be Microsoft’s biggest increase in the cost of its subscription Office products, which are expected to rise in price by 10 per cent.

The story is similar for Alphabet, which clearly separated itself from the Facebook, Twitter and Snapchats of the world when reporting a 41 per cent increase in revenue and 43 per cent increase in advertising revenue. Management put the outperformance (compared to rivals hit by Apple’s new privacy restrictions) to the fact that Google offers an “intent-driven” buying model. This means people are actually searching for the products to which they receive ads.

Alphabet has continued its growth to become an “artificial intelligence” company, but ultimately is seeing to build more helpful products to people, and this is what truly stands out. Investing in Big Tech companies that are using people’s data to target them, versus those that appear to be using people’s data to improve the service they deliver and the businesses of those with whom they work.

By comparison to these outstanding numbers, Wesfarmers, a company I consider among the best managed in Australia, delivered revenue growth of 10 per cent for the full-year and profit growth of 16 per cent, yet it trades just 10 per cent cheaper than two of the largest and fastest-growing companies in the world.

Investing globally has always been a step too far for many investors, yet it has become easier than ever to achieve via ETFs, managed funds, platforms and other trading accounts. When we look back 10, 20 or 30 years from now, I know which companies I want to be holding. 

Drew Meredith

Drew is publisher of the Inside Network's mastheads and a principal adviser at Wattle Partners.