Joey K. from Hershey, PA asks: Hello Mitch, do you think the recent antitrust lawsuit against Apple is a big deal for the Tech industry at large? What are your views on the Technology sector at the moment?
Mitch’s Response:
Thanks for writing, Joey. The first point I need to make is that I don’t write about individual stocks in this column or others, so any mention of Apple or other companies should not be construed as a recommendation.
For readers who aren’t aware, late last month the U.S. Justice Department sued Apple, accusing the company of monopolizing smartphone markets. Apple has been the subject of anti-competitive lawsuits before and has generally prevailed. A few years ago, Epic Games lost a lawsuit against Apple alleging the company of a monopoly over mobile games, which arguably means the Justice Department has a tall mountain to climb.1
In the realm of tech regulation, I would also add that overseas, the European Union began enforcement of the Digital Markets Act on major tech companies, which is likely to raise costs in the form of adjusted business practices, strategies, and compliance. So, I think it’s fair to say that regulatory headwinds are growing globally.
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But in my view—and to answer your question—these legal fights and forced adjustments to business practices are likely to stretch out over many years, and may result in some level of drag on earnings. But the bigger risk is that a major company is forced to be broken up, or that regulations target major revenue sources. In my view, neither of these latter outcomes seems likely, even as the appetite for regulation is high and rising.
Technology continues to be a dominant performer from a sector standpoint in the U.S., which has many wondering if ‘euphoria’ is starting to come into play. Indeed, investors can easily get over-excited about innovations in technology, especially ones with the promise to reshape the entire economy. Readers remember the 2000 tech bubble.
What’s different about today, however, is that the game-changing innovations—namely generative artificial intelligence and machine learning that many are excited about—are already generating massive profits for companies producing the chips, servers, and infrastructure needed to power this nascent technology. Major AI suppliers and beneficiaries alike are seeing incredibly strong free cash flow margins, outpacing every other sector’s net margins.
Another key is that unlike 1999 (and 2020), unprofitable tech companies are not seeing the same kind of valuation surge that accompanied more speculative technology bull markets of the past. While many of the highest-quality tech company valuations are back up near the 2020/2021 highs, investors are favoring companies with strong and rising earnings—signaling a ‘healthier’ rally in the sector that I think can be sustained as long as profits are being generated at this pace.
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Disclosure