THE TECH wobble of 2018 has turned out to be short-lived. In the final three months of last year, American technology shares dropped by 16%. Since then, however, the biggest firms, including Apple and Facebook, have come roaring back, with their stock prices today sitting near record highs. Meanwhile a parade of smaller digital companies have rushed to float their shares, including Uber and Slack. Airbnb could be next. All told, listed technology firms make up more than a quarter of the value of America’s stockmarkets.

The last time tech companies were so important was back in 2000, when they were briefly worth a third of the value of all listed equities in America. Turmoil ensued soon after, with share prices in the sector falling by 66%. Compared with the dotcom bubble, the industry is more concentrated today: Microsoft, Amazon, Apple, Alphabet (Google’s parent) and Facebook represent half of its market capitalisation. The prevailing concern is not that tech firms are too flimsy to justify their valuations, but that their position is too powerful.

The lofty prices for the big five rest on strong fundamentals. In 2010, they made 4% of the pre-tax profits of non-financial firms in America; that figure is now 12%. Their valuations imply that investors expect earnings to grow fast. They have good reason to be bullish, because today’s giants are protected by high barriers to entry.

One element of this is that the big tech firms are spending heavily on innovation to try to ensure they remain at the cutting edge. In 2010 the big five tech companies accounted for 10% of the S&P 500’s total spending on research and development. Today, their share is 30%.

The big tech firms have also been keen to gobble up potential rivals. When Facebook was young, it rejected myriad acquisition offers, but it is now a predator, not prey, paying $19bn for WhatsApp in 2014. Since 2010, the big five have spent a net $100bn in cash (and more in stock) to buy would-be rivals. Partly as a result, the number of listed American firms worth at least $1bn that produce software or hardware has been flat since 2000.

The public has a love-hate relationship with big tech. Amazon delivers goods cheaply and makes only a slim margin. Studies suggest that many Americans would pay thousands of dollars a year rather than forfeit access to the digital services they get free. As a result, advertisers still throw mountains of money at tech firms in order to get access to their users. In 2019, one-third of the $240bn spent on advertising in America will be with two firms, Facebook and Google.

Nonetheless, the spectre of big tech firms abusing their troves of user data has sullied their image. In a new survey by Pew, a pollster, 33% of Americans say that tech companies have a negative effect on society, twice the share in 2015. In July the Department of Justice announced an antitrust review of the industry’s leading firms. If you type “Should Google…” into the firm’s own search bar, the first autocomplete response is “be broken up”.

Sources: Datastream from Refinitiv; Bloomberg; BEA; eMarketer; Open Secrets; The Economist



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