Facebook (FB) has been in demand due to people spending increased hours on social media. However, the stock might lose its appeal in the short-term for several reasons. FB’s financial performance hasn’t been as impressive during the past two quarters. The company witnessed a strong bottom line but its revenue growth over this period has been the slowest. The company also stated that 2021 remains a year of “significant” uncertainty. Compared to the third quarter, FB expects flat to slightly lower fourth-quarter users, daily and monthly, in the United States and Canada. The stock has climbed 35.8% year-to-date to close at $278.77 yesterday.
FB also braces for an antitrust lawsuit by the Federal Trade Commission any day. Though such cases might take years to settle, FB faces a short-term risk for the same. The FTC might attempt to prevent any further mergers by FB and this could come as a blow to the company’s long-term goals. The company may also come under pressure to reverse its deal with WhatsApp and Instagram.
Hence, investors might want to look at other mega-cap tech stocks that have a persuasive growth story. Three such stocks are Microsoft Corporation (MSFT), Amazon.com, Inc. (AMZN),, and Alphabet, Inc. (GOOGL). These trillion-dollar companies have a lot of room for growth and will be relatively safer bets to pursue over the long run.
Microsoft Corporation (MSFT)
With over four decades in business, MSFT is stronger like never before. Its growth story has been nurtured by CEO Satya Nadella who took the tech giant on a different trajectory with its Cloud Computing platform, Microsoft Azure. The market capitalization of MSFT is $1.7 trillion.
During the first quarter ended September 2020, the company’s revenue jumped 12% year-over-year to $37.2 billion. The Intelligent Cloud segment which includes Azure gained 20% year-over-year to $13 billion. Besides strong revenue growth, MSFT also maintains a consistent profit margin. Despite tough competition in Cloud Computing and the business being old, the company has generated a profit margin of 37.3%, which is noteworthy.
MSFT is likely to witness revenue growth of 8.9% year-over-year for the quarter ending December 2020. Analysts expect the EPS to increase at a rate of 14.5% per annum for the next five years.
Besides Microsoft Azure, the company continues to offer its flagship Windows operating system alongside developing and selling the Xbox gaming consoles. The Xbox Series S and Series X launched this month could fuel growth for MSFT’s gaming segment as high demand is likely ahead of the Holiday season and renewed possibilities of a lockdown amid the resurgence of coronavirus.
During the pandemic, as most businesses transitioned to remote working, the demand for Azure has been on the rise. Apart from Azure, the Teams were also instrumental in achieving resilience for MSFT. During the fourth quarter ended June 2020, CEO Satya Nadella indicated that Team users are clocking in up to five billion meeting minutes each day. The rate of adoption is still on the rise due to remote working and online learning.
Thus, MSFT, with its diversified line of products, could capitalize on the pandemic and leverage it towards growth. On a year-to-date basis, MSFT gained 38.5% to close at $218.39 yesterday.
How does MSFT stack up for the POWR Ratings?
B for Trade Grade
B for Peer Grade
B for Buy & Hold Grade
B for Industry Rank
B for Overall POWR Rating
The stock is also ranked #8 out of 96 stocks in the Software – Application industry.
Amazon.com, Inc. (AMZN)
As we prepare for the second wave of the Coronavirus, online shopping will continue to thrive. Moreover, with the Thanksgiving and Holiday Season being around the corner, things look brighter for e-commerce companies.
E-commerce giant, AMZN, has flourished amid the COVID-19 pandemic as most of the businesses shut down and people were compelled to be home-bound. While consumers flocked to AMZN for their needs, businesses also ventured online to ensure their survival. Thus, the company was a savior on multiple fronts. However, AMZN had to spend nearly a whopping $4 billion for ensuring COVID-19 related safety protocols.
Besides, retailing, the company has invested massively in Cloud Computing and self-driving transportation. In June, AMZN announced the acquisition of Zoox, an autonomous vehicle start-up for about $1.3 billion. The company is also exploring the online healthcare market, and purchased the PillPack, an online pharmacy, in 2018 for about $1 billion.
While these businesses are still at the exploration stage, they indicate AMZN’s quest to diversify its operations to be recession-resistant. It has achieved massive success with its Cloud business, AWS, and online video services Amazon Prime. It also has a major presence in the smart home market with its Echo and Alexa devices.
It is noteworthy that a company as huge as AMZN is still able to post a high-profit growth, and this makes it a compelling stock. What’s even more remarkable is that most of its profits come from the small revenue generated by AWS.
During the third quarter ended September 2020, AMZN’s revenue climbed 37% year-over-year to $96.1 billion. The AWS segment posted a 29% year-over-year growth in revenue at $11.6 billion. The company’s EPS for the quarter tripled to $12.37 from $4.23.
The street estimates revenue for the fourth-quarter ending in December 2020 to be $119.5 billion, indicating a 36.6% increase year-over-year. Meanwhile, the EPS for the fourth quarter is expected to be $7.08, up 9.4% year-over-year. The stock rallied 79.2% on a year-to-date basis to close the session at $3143.74 yesterday. The company has a market capitalization of $1.6 trillion.
AMZN’s POWR Ratings reflect this promising outlook. It has an overall rating of “Buy” with an “A” for Industry Rank and a “B” for Trade Grade, Peer Grade, and Buy & Hold Grade. In the Internet industry, it is ranked #4.
Alphabet, Inc. (GOOGL)
Despite the threats of a major antitrust lawsuit looming large, GOOGL remains one of the most sought-after consumer tech stocks. Digital advertising is the core of GOOGL’s business model. Together with FB, it commands nearly 70% of the digital advertising market in the United States. Meanwhile, the company’s Android operating system has a 75% market share globally. As a search engine, it controls over 90% of the global market. GOOGL’s market capitalization is $1.2 trillion.
Besides the core search engine, GOOGL also has a lot of other businesses under its umbrella. YouTube, Google Play, and it’s Smart Home speakers have become a lot more relevant amid the pandemic.
During the pandemic, GOOGL’s major source of revenue, the advertising took a huge hit as the advertisers slashed their budgets across the globe. However, in the third quarter ended in September 2020, the company’s revenue grew 14% year-over-year to $46.2 billion, driven by a rebound in the advertising revenue. It is a huge relief for the investors that the company’s core business is back on track.
YouTube is also a key indicator of rising on-demand media consumption. YouTube’s ad revenue surged 32.6% in the third quarter, while YouTube Music and YouTube Premium have a combined paid subscriber base of over 30 million. Major brands are shifting their ad base to digital platforms and YouTube is positioned to benefit from this. GOOGL’s EPS for the third quarter climbed 62% year-over-year to $16.40.
GOOGL’s futuristic businesses such as self-driving car company, Waymo, and Life Sciences business Verily also look quite promising. The street expects revenue for the quarter ending December to be $53.1 billion, up 15.2% year-over-year. Meanwhile, EPS is likely to grow at 16.5% per annum for the next five years.
On a year-to-date basis, GOOGL rose 31.5% to end yesterday’s session at $1,761.42. The Department of Justice’s antitrust lawsuit didn’t seem to have any material impact on the stock price. The legal battle could be long-drawn and investors aren’t factoring it in now.
It’s no surprise that GOOGL is rated “Strong Buy” in our POWR Ratings system. It also has an “A” for Trade Grade, Peer Grade, Buy & Hold Grade, and Industry Rank. Out of 58 stocks in the Internet industry, it is ranked #2.
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FB shares were trading at $272.43 per share on Tuesday afternoon, down $6.34 (-2.27%). Year-to-date, FB has gained 32.73%, versus a 11.58% rise in the benchmark S&P 500 index during the same period.
About the Author: Namrata Sen Chanda
Namrata is an accomplished financial journalist, with nearly a decade of experience. She specializes in interpreting news releases and framing investment strategies, and has worked with some of the leading companies in real estate, banking, insurance, mutual funds, financial research, fintech, and investment education. More…
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