The horse race to become the world’s first company worth $1 trillion is on, in earnest, with Alphabet, Apple, Microsoft and Amazon.com set to report their most-recent financial quarters by May 1.
We may not be in the home stretch just yet, but with all four sporting valuations between $713 billion (Alphabet, after a big post-earnings drop) and Apple’s $835 billion, and with profits at all four expected to grow by double-digits this year, we may be at the last big curve before the stretch — depending in part on, of course, on the momentum of the broader stock market.
And like any horse race, each contender brings strengths and weaknesses. Who will get to the finish line first?
Read: Can Facebook, Apple and Google keep powering tech’s growth?
Amazon-Microsoft bookends
Amazon is AMZN, -2.80% the speed horse, a pure growth company powered by its retail business and the surge of Amazon Web Services (AWS), a cloud-computing business. Microsoft MSFT, -2.69% is a strong horse with its own cloud-computing business, but carrying the extra weight of slow-growing legacy businesses tied to personal computers and corporate servers that the cloud is displacing.
Alphabet GOOG, +0.07% GOOGL, -0.06% is the one-trick pony, whose search-advertising business has been a thoroughbred for almost 14 years but that hasn’t sold Wall Street on its other efforts. And Apple AAPL, +0.36% is the longtime favorite that may be fading late in the race.
But it’s notable that 12-month target prices from Goldman Sachs don’t have any of the four getting to $1 trillion within a year. That’s one price of rising wariness about Washington, and especially President Trump, as higher interest rates and inflation fears spook markets.
The most obvious candidate to get to $1 trillion is Amazon, at least from this standpoint. According to Goldman Sachs estimates, Jeff Bezos’ behemoth will boost revenue by 34% this year to $238.5 billion. The AWS business has helped Amazon lick its historic unprofitability (like so much 21st-century news, Trump hasn’t learned this yet), setting it up to earn $25.8 billion this year before interest, taxes and non-cash charges and nearly $35 billion in 2019.
Wall Street’s newfound love of Microsoft puts the one-time fuddy-duddy of PC software into the running for $1 trillion as well. Its Azure cloud started later than AWS did, but it’s growing faster. Goldman estimates that Azure will expand 91% this fiscal year to $8 billion in sales as it turns profitable.
But Microsoft also has its slower-growing Office and Windows businesses that, cash cows that they are, support both investment in the cloud and a 1.8% dividend yield. Profits, shares and dividends should all keep rising as Azure recovers Microsoft’s capital investment and begins to produce bigger returns.
Trump tax cuts
Read: The tax bill accelerated the bull market — and may make its end more painful
The race to $1 trillion points to the pluses and minuses of Trump’s big corporate tax cut. The administration hopes that its investment incentives will make more companies take big bets like Alphabet, Microsoft and Amazon’s ventures into cloud computing and other technologies.
But Apple’s recent struggles — its shares are down 10% since early March — point to skepticism that the tax bill’s effort to incentivize big stock buybacks, like the one expected to accompany the repatriation of Apple’s $250 billion-plus of cash nominally held outside of the U.S., will actually push stock prices much higher. Goldman estimates that cost controls can add seven times as much to Microsoft’s earnings per share as share repurchases.
“Buybacks have become a less dependable way to predict future stock performance in recent years as their popularity has grown,” Goldman Sachs’ Rod Hall said, warning that potentially slower iPhone sales growth is a bigger deal for Apple shares than buybacks. “Although Apple has historically done well with their buybacks, we point out this was mainly in times of improving fundamentals. As we look to the horizon, we see a less clear path to better financial performance than consensus is predicting.”
Investors expected more
Lastly, the reaction to Alphabet’s first-quarter earnings release Monday shows that the market is in no hurry to push down the $1 trillion barrier, as shiny a butterfly as the prospect is to writers like me (and Jim Cramer, among others). Alphabet beat analysts’ estimates on revenue, its 33rd straight quarter of sales growth better than 23%, according to RBC Capital Markets analyst Mark Mahaney, and operating margins are 25%.
But shares went down despite the very solid news, as investors balked at Alphabet’s relatively lax expense controls — a decade-old issue for Alphabet, reflecting the simple fact that CEO Larry Page is a much more aggressive animal and investor than your typical fund manager — including losses in its Nest smart-home business.
In fact, all the FANG stocks are down 10%, or close to it, from their recent highs, even as earnings keep doing well.
That means the timing of the race to $1 trillion may have as much to do with broad market sentiment, including perceptions of the president, as it has to do with company fundamentals. And right now, sentiment stinks.