After the world’s largest tech companies enjoyed a boom during the coronavirus pandemic, the expectation was that life would gradually return to normal.
It certainly is not turning out that way.
Big Tech this week reported a surge in growth and profits that stunned Wall Street, delivering powerful evidence that the digital dependence forced on a large part of the world’s population over the past year could have an enduring effect.
The outsized figures amount to a reset in the business world, some tech investors and analysts said. According to this view, the leading digital powers have consolidated their gains from the past 12 months and made themselves an even more indispensable part of work and personal life.
“It’s been an unbelievable tech reporting season for the biggest of the big,” said Jim Tierney, a fund manager at AllianceBernstein.
Big Tech’s increasingly outsized impact on the world of business can best be summed up by just two numbers.
One is the combined revenue of Alphabet, Amazon, Apple, Facebook and Microsoft, which jumped 41 per cent in the first three months of this year, to $322bn. That points to a rapid acceleration in growth that the leading tech companies have not seen in years, even as they have become some of the world’s biggest companies.
The other is the companies’ profit growth, which has been even more spectacular. After-tax earnings for the five soared by 105 per cent from the previous year, to $75bn. Profit margins rose strongly across the sector, as the biggest companies benefited from the economics of scale while keeping a wary eye on cost expansion during the pandemic.
Wall Street already had an appreciation of the defensive power of the tech stocks, believing them to be resilient to the worst of the downturn, said Tierney. Less understood until recent days, he added, was the fact that Big Tech is poised to lead the way out of recession as well, as consumer and business activity surges across their digital platforms.
It is not even as though Big Tech’s latest performance has been flattered by comparison with a weak quarter a year ago. All but Apple were growing by more than 10 per cent before the pandemic hit, though their growth rates had been decelerating.
Underpinning the spectacular financial performance disclosed this week has been a subtle shift in the role that Big Tech’s platforms play in everyday life, said Gene Munster, an investor at Loup Ventures.
“Consumers once valued choice, but what they value now is dependability,” he said. That has led them to concentrate more of their attention and spending on a handful of familiar, easy-to-use platforms like the iPhone, Google’s search engine and Facebook’s Instagram, he added — habits that became deeply ingrained as screens came to play a central part in all facets of life.
Whatever the reason, the first anniversary of the pandemic has been marked by an across-the-board leap in both activity and monetisation on the largest digital platforms. Barring a reversal as the world reopens, that has set a new and higher bar for the tech companies to be measured by.
“The question is, how high is the new plateau?” said Brian Wieser, head of business intelligence at GroupM, part of advertising group WPP. “It’s certainly higher than we expected two weeks ago.”
The stellar first-quarter performance can be traced clearly in a handful of areas. Digital advertising, which has been making steady inroads into traditional forms of commercial messaging for years, has jumped sharply.
The most widely-used mobile and cloud computing platforms, from the iPhone to Amazon’s cloud services, have seen a new burst of activity. And some leading tech companies have capitalised on the extensive use of their platforms to mount an incursion into a wider range of highly profitable services.
“Pre-pandemic, we were seeing a deceleration in digital advertising growth — but the pandemic has juggled a lot of things,” said Wieser. Brand owners developed a new appreciation of digital advertising during the pandemic as they became more reliant on online sales, he added, while the many new businesses formed over the past year have turned naturally to online channels to find a market.
Google and Facebook each registered their strongest advertising growth for years, with Google’s ad revenue increasing 32 per cent and Facebook’s leaping 46 per cent. The leaps come against a recovering backdrop for global advertising markets — though they far outpace the 10 per cent rebound expected for the industry at large this year, according to GroupM.
The time and money consumers are now willing to lavish on their most important gadgets, meanwhile, was seen in a 66 per cent leap in Apple’s revenue from the sale of iPhones. Even the market for PCs, which had been in decline, saw a strong rebound, with unit sales leaping by around a third in the first quarter, raising earnings at Microsoft.
By comparison, the steady expansion of the cloud computing platforms run by Amazon, Microsoft and Google, which have become a mainstay of corporate IT departments, have made fewer headlines. But the rise of remote work, learning and entertainment enabled all three cloud operators to maintain the growth rates they were recording this time last year — even as they become much larger, and as some of their customers were hard hit during the pandemic.
Meanwhile, the tech companies have taken advantage of their deep ties with millions of users to extend their reach deeper into some of the services delivered over their platforms. Apple’s move into services, once disdained by Wall Street as an uninteresting sideline to its gadgets, contributed to a profit jump that lifted its gross profit margin to more than 42 per cent — a breakout from the level of around 38 per cent that had held over many quarters.
At Amazon, meanwhile, newer services have brought a transformation in the company’s profit profile. That includes the growth of the Amazon Web Services cloud platform, as well as advertising — as seen in a 73 per cent leap in the company’s “other revenue” category, which consists mainly of ads, in the first quarter.
The result was a record quarterly profit for a company once notorious for its persistent losses. Amazon’s $8.1bn in after-tax earnings in the quarter was equivalent to the company’s net earnings in its entire first 22 years of existence.
Amid the euphoria on Wall Street, concerns about potential intervention by regulators to curb the power — and profits — of Big Tech were briefly forgotten. Shares in all but Apple were at or very close to all-time highs in the wake of the latest figures.
There were few other worries to spoil the party. An end to the strong secular growth trends that have lifted Big Tech could loom before too many years, said Tierney. But he added: “How many years can Microsoft grow 50 per cent in the cloud business, and how many years can Google’s advertising keep growing at 30 per cent? There’s no sign of them hitting the wall yet.”