There has been a lot of hype about cloud computing for the last few years. Growth in the sector has been massive, and Amazon Web Services (Amazon’s cloud business) has become a key indicator for investors. A new report out today shows why now might be a good time to invest more in the sector. The report shows that large enterprises are planning to increase their overall spending on cloud product, and by 2021, the cloud will account for 32% of overall tech budgets versus 30% today. More impressively, spending on the cloud by large enterprises is up 59% since 2018 to $74m annually.
FINSUM: A 2% shift in tech spend into the cloud alone is a good driver of business. It is probably a good medium to long-term bet to take a look at a handful of cloud stocks. Check out at Global X's CLOU for a good cloud computing ETF.
For the last week, Microsoft has been in a delicate dance to try to acquire the hugely popular social media app TikTok. President Trump has been adamant that it needs to be bought by US interests or he may ban the app. Last week, Microsoft said it was trying to acquire the company, but then swiftly abandoned the efforts because Trump said he would block the deal. Now, Microsoft says that Satya Nadella and Trump have spoken and gotten on the same page and that the deal is back on. Wedbush thinks the deal could be transformational for Microsoft as it would put them in direct competition with Facebook, Alphabet etc, and give them a huge social media prize while those competitors remain mired in major regulatory scrutiny.
FINSUM: TikTok already has 100 million users in the US. We think if this goes through it could end up being a major boost to Microsoft. Perhaps not unlike Facebook’s acquisition of Instagram.
Ever on the search of new ways to think about the markets and innovative methods to predict them, we found new research from UBS which identifies a good new predictive indicator for single stock performance. That indicator is pay revolts. UBS ran an exhaustive study of 1,700 known pay revolts (when shareholders vote against executive compensation packages), and found that such companies were much more likely to suffer share price underperformance following the event. The average one-year underperformance after a pay revolt was 15%.
FINSUM: This is great info in its own right, but what makes it very timely is that Netflix lost a pay vote last year, as did Ameriprise and Xerox.
No matter how good you may feel about stock indexes being back near all-time highs, one fact cannot be ignored: the market seems to be heavily overweight on the five largest tech stocks— Microsoft, Facebook, Google, Apple, and Amazon (the new acronym, named by Goldman is FAAMG). These stocks have been powering the market, but the whole situation feels like past peaks where their outperformance could not go on forever. Concentration in the S&P 500 is now at its highest in decades, with those five names accounting for 22% of the total capitalization, up from just 16% a year ago. According to Barron’s “Simple arithmetic limits the continued outperformance of the biggest names, the Goldman team observes, because many portfolio managers have 5% limits on holdings of any given stock. The strategists’ analysis shows that the average large-cap mutual fund already has a 5% position in Microsoft and about 4% positions in the other big four names.”.
FINSUM: It seems these stocks are reaching their institutional allocation limits, which mans retail needs to power them higher. The whole situation feels ripe for a correction.
If Biden wins the presidency and Democrats take the House and Senate, tax hikes look inevitable. Biden is already publicly planning for them, and the way the polls are going, advisors would be wise to give the eventuality some thought. Even if Democrats don’t win the Senate, there may still be a tax overhaul. With that in mind, these are the stocks likely to be the hardest hit by a Democrat-led tax package. Based on Biden’s plan, it looks like a 10% rise in overall corporate taxes. Zion Research is leading the charge into the analysis, and here is an overview (quote from Barron’s): “Zion notes that 117 companies [in the] S&P 500 have over $100 million in net income that had cash tax rates less than 15%. Biden’s plan for a 15% minimum tax on book income would mean that group combined pays another $37 billion in taxes. According to Zion, nearly half of that would come from five companies: Berkshire Hathaway (ticker: BRK.B), Intel (INTC), AT&T (T), Duke Energy (DUK) and Amazon.com (AMZN). Biden called out Amazon specifically during his speech, when he said, ‘The days of Amazon paying nothing in federal income tax will be over’”.
FINSUM: This is quite astute analysis as these are stocks that are benefiting in a very significant way from the current tax regime. Amazon seems to have a big risk here that is not properly understood by the market.
For a lot of people, BlackRock brings two things to mind: fixed income and ETFs. Therefore, the firm making a bold call about a handful of single name stocks comes as somewhat of a surprise. However, BlackRock is the largest asset manager in the world and is also a leader in equities. The call they are making today is that big tech companies are looking strong and likely to keep seeing price expansion. On the one hand, this is a very easy call to make given tech stocks have been soaring, but on the other, it is somewhat of an interesting and risky call because many fear FAANGs can really only go down in the short-term. BlackRock says that the cash flow producing abilities of tech companies (a factor proven to be vital in this downturn) will be critical to their continued success.
FINSUM: There might be some short-term tailwinds, but in our view, big tech companies are going to keep moving higher because this crisis has created a huge opportunity to grab market share as more of life moves online.