The tech industry actually consists of two sectors. There are the five giants operating on an almost unimaginable scale, and then there are all the others.
Alphabet, Amazon, Apple, Facebook, and Microsoft all reported earnings for the March quarter this week, and some of the numbers released showed how dominant they are. In many cases, relatively small businesses buried in the giants generate more revenue than entire well-known technology companies.
Google’s YouTube is well on its way to generating as much revenue this year as Netflix – once referred to as a peer in the collection of “FAANG” shares. Still, YouTube is a relatively small company for Google, accounting for only 13% of advertising revenue. Parent company Alphabet made $ 4.5 billion on the appreciation of investments it has made in startups over the past decade, as many of those startups have gone public or started new rounds with dramatically higher valuations to have.
Amazonadvertising The business was nearly $ 7 billion in the quarter and its growth rate is accelerating. That’s almost seven times the amount on Twitter, but with Amazon’s total quarterly revenue of over $ 108 billion, it’s barely noticeable. The company’s cloud computing business, Amazon Web Services, generated more revenue in the first quarter of 2021 than Oracle did in the third quarter of the fiscal year that ended February 28.
Microsoft LinkedIn generated more than $ 3 billion in ad revenue last year, which is more than the entirety of Snap or Pinterest. However, that’s a drop in the bucket for Microsoft, which has posted over $ 121 billion in the past nine months alone.
AppleGadget shop, The title “Wearables, Home and Accessories”, consisting of Apple Watch, audio add-ons like AirPods and HomePods, and other home devices like Apple TV, posted more than $ 7.8 billion in the quarter ended March 31st. That’s more than the HP laptop business in its quarter that ended January 31 – which, unlike Apple’s quarter, included the Christmas shopping season. Still, it only made up 8.7% of Apple’s total sales. The iPhone business from Apple is now in a class of its own – it achieved more sales than Microsoft as it has for years.
Facebook does not break the performance of its divisions, making it difficult to get a feel for how they are holding up against stand-alone competitors. According to the company, 2.7 billion people use one of its apps every day, and 3.4 billion people use them at least once a month. That makes it on par with these other giants, even if it’s the only one whose market capitalization is still below $ 1 trillion. Bloomberg reported that Instagram generated $ 20 billion in advertising revenue in 2019, making it one of the largest digital advertising properties in the world – well ahead of social media competitors like Snap, Pinterest and Twitter.
The law of large numbers turned on its head
Typically in business, companies encounter the “law of large numbers” and growth rates slow down. Conventional wisdom has it that it is much harder to generate $ 500 million in new revenue than $ 50 million. Therefore, under mathematical law, it is more difficult to grow 50% from $ 1 billion than from $ 100 million.
But the nature of technology platforms turns that law on its head. When a tech company grows to a really massive size – and all of those companies have multiple companies reaching more than 1 billion customers – it’s easier to grow by gathering additional revenue streams from a massive installed base than starting new businesses from scratch to invent or steal customers from larger competitors.
These giants can use the data from their already extensive activities to find out about their customers and effectively sell them new products. You can use existing customer relationships to sell additional products. You can use their cash flow or stocks to buy promising new Upstarts and clone them if they decline.
Nothing makes a bump. They wipe out Congressional hearings, regulatory fines, antitrust investigations, complaints from disgruntled employees, union movements and negative press like so many mosquitos. When the Covid pandemic hit the economy and shut down most of the world, they flourished. Now that Covid is waning in the US, they continue to thrive.
Smaller tech companies offer greater growth opportunities and returns over the long term. However, if investors are looking for investments with the safety of US Treasuries and the prospect of at least some future growth, there is no asset class like the tech giants.