They may miss a market shift, rivals are still hunting for their customers, and antitrust is there
Investing in technology is all about creating a business that cannot be copied and earning monopoly-style margins. Investors seem to think that Microsoft and Apple have done it, but they may be overvaluing the moats (moats, competitive advantages).
In the last year, the valuations of Meta Platforms and Netflix have been affected by competition in the realm of advertising and streaming video, prompting investors to reassess their growth prospects. Meta shares, for example, have lost half their value since the start of 2022, as tech giants Amazon and Apple rapidly expand on hype. The rise of TikTok makes the walls around ad-reliant social networks in particular seem flimsy. Similarly, the growth of streaming services from Apple, Disney and others have slowed subscriber growth at Netflix and pressured margins.
Investors have fewer worries when it comes to Microsoft and Apple. Its first-quarter mobile phone shipment market share in North America topped 50%, according to Canalys, so it’s increasingly inconceivable that users will part with their iPhones. And it’s plausible to think that the CEO of the $2.5 billion company, Tim Cook, will succeed in selling more advertising and financial services to his clients. It’s even harder to imagine companies abandoning their workplace software to Microsoft, which, for example, has 85% of the US public sector productivity software market share, according to Omdia.
And yet, valuation multiples reflect these relative expectations, and more. Meta’s stock price has corrected so much that its enterprise value is now worth less than 4 times estimated earnings for the next 12 months. Five years ago, that metric was 9 times, according to Datastream. Netflix has an enterprise value of 3 times estimated revenue for the next 12 months, half of its valuation five years ago. For its part, Apple, with 6 times, doubles its valuation of five years ago. Likewise, Microsoft’s multiple has risen 60%, to exceed 8 times.
The barriers of these last two companies are affordable. Rivals still want to steal customers, antitrust regulators can’t be entirely ruled out, and the biggest threat — that they miss out on a market shift as technology advances — remains.
Although moats protect against rivals, they can do little against a downturn that destroys profits in the sector as a whole. Technology investors may be right in their analysis, but wrong in how they value it.