New Technology Stocks Are The Only Ones Creating Real Value In The US Markets

Google

F. Barciela /F.G. Ljubetic | The stock market valuations of new technology firms have reached dizzy heights in the US over the last few years.  And it doesn’t look as if their stratospheric rise has stopped. Google, now Alphabet, has a stock market value of 491 billion dollars, while Apple’s is 484 billion. Facebook is worth 345 billion dollars and Amazon 337 billion.

These companies’ stock market value is so huge that there are very few European countries with a higher GDP. Only eight out of the 28 EU members have a GDP which exceeds Google’s value. The combined value of the four companies is a whopping 1.6 trillion dollars, much more than the GDP of Spain (1.4 billion), the fourth largest economy in Europe and a country with 45 million people. If the companies continue to rise, they will soon be together worth as much as Italy’s GDP.

And they have achieved these massive valuations in a very short time. Google, the strongest, has only been on the stock market since 2004, and Facebook since 2012.

The way their value has multiplied has been amazing. Google, which was worth 140 dollars in 2008, is now worth 725 dollars, five times more; Apple, which was worth 14 dollars in 2009, is now six times higher at 90 dollars; Amazon has seen its value multiplied by 11 to 709 dollars from just 63 dollars in 2009; and Facebook, which was worth 23 dollars in 2012, has quintupled its value to 120 dollars in just four years.

While these Silicon Valley firms have beaten even the most crazy forecasts, it’s a fact that old economy companies are worth quite a lot less in comparison. Boeing, the world’s largest aeroplane manufacturer is worth only 85 billion dollars, five times less than Google, while Ford, the second biggest car manufacturer in the US, just 53 billion dollars, almost 10 times less. Even Coca Cola or McDonalds, two world leaders in their sectors, are worth just 198 billion dollars and 114 billion respectively.

There is no comparison with the dimension of the new techonology firms. And that’s because, despite their international presence and the growth of the US economy in the last few years, these companies have not performed well in the stock market. Investors who bet on them some time ago are still waiting for a return on their investment.

Ford is worth less now (13 dollars) than in 2001 (18); General Electric, once a stock exchange favourite, is worth 29,6 dollars compared with 60 dollars in 2000; Chevron, the second biggest oil company in the US, is worth 101 dollars, the same as in 2008; Du Pont, one of the leading chemical companies was worth 70 dollars in 2000, and now it’s at 63 dollars; Alcoa, a world leader in the aluminium industry, is now at 9 dollars compared with 43 dollars in 2008.

Some exceptions would include Boeing, which has quadrupled its value in the last seven years, Coca Cola which has doubled its value or McDonalds, now worth just a bit more than double.

This situation – these differences in value and in growth – might seem surprising if we take into account that the big technology companies still have very low revenues considering the value they have. The only one which can boast spectacular figures is Apple, which had a turnover of 233 billion dollars last year, or perhaps Amazon, with 107 billion dollars. But even Google, which is worth the most, still has very modest revenue figures, around 75 billion dollars; and Facebook still has to show its worth, with a turnover of just 18 billion dollars.

On the other hand, while they are worth much less, General Electric had a turnover of 117 billion euros last year, Ford 149 billion and Chevron 130 billion.

The answer lies, of course, in the growth differential. Chevron’s revenues are half of what they were four years ago, while Coca Cola’s have dropped by 10% and those at General Electric by 20%. Meanwhile Apple’s revenues have grown 50% in the same period and Google’s by 63%, while Facebook has tripled its revenues and they have almost doubled at Amazon.

So technology companies, always considered as risky stocks and not very suitable for conservative investors, have ended up being the safest. It’s as simple as that. And not just the afore-mentioned four big ones. Between 2009 and 2016, Adobe has quintupled its market value and eBay tripled. And these are just two more examples.

The million dollar question is: will they continue to rise? The majority of analysts will now say what they have always said: be careful with these stocks! Many even warn that with such huge valuations, we could be facing a bubble. But if we look at the PER of these Silicon Valley companies, they are high, but not excessively so, particularly if revenues continue to grow at the same pace as in the last few years.

Google’s PER is 31, but you need to bear in mind that profits have grown 60% in the last four years; Facebook’s PER is very high at 73, but profits have multiplied by 70 in 2012-2015; Apple, with a PER of 10, is a cash cow. Profits last year stood at 53 billion dollars, almost 25% of sales. Who makes more? The exception would be Amazon, with a PER of 292, but which is now beginning to make money.

Having said all that, it’s clear that technology companies are dangerous. Their fall is as fast as their rise, or they stagnate for ever. Now it’s the time for the big Internet or software companies. But the hardware or services firms, leading lights 15-20 years ago, are having a bad time. A case in point is IBM, which is still worth less than in 2003 (148 dollars compared with 205 dollars). Then there is Intel (30 dollars versus 70 dollars) or HP (16 dollars compared with 75 dollars). This would seem to suggest that their time is over. So the big question is: when will this happen to Apple, Google, Amazon, Facebook and company? Whoever works this out, will be a rich man.

About the Author

Fernando Barciela
Fernando Barciela has been a regular collaborator for Spain's leading daily El Pais' business section since 1994. He is also a regular collaborator on foreign policy. For Grupo Consejeros he interviews the top executives of Spain's listed companies. He was a correspondent with Diario de Noticias, Portugal's leading daily newspaper, in 1987-2004. He has a degree in Business Science and Journalism from the Complutense University.