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Why the growth story is just getting started
The value vs. growth debate has been played out in numerous ways for close to a decade. The results today are clear. Those who remained steadfastly invested in value stocks have significantly underperformed the benchmark and may well have left investors with less capital than the same time ten years ago.
Traditional value stocks remain growth and structurally challenged, whichever way you think about it. Financials and banks are being disrupted by technology, whilst traditional materials and energy companies are being faced with a tsunami of green capital seeking to invest into companies contributing to a more sustainable economy.
Value stocks have had their moment in the sun, supported by the most unique circumstances in modern history, having outperformed since news of the vaccine in October last year. Yet last week’s reporting season has reiterated the incredible power, importance and opportunity that lies ahead for ‘growth’ companies.
Microsoft (NYSE: MSFT) is the perfect example. The company just recorded quarterly revenue of US$41 billion, up 19% on the previous corresponding period (pcp), which contributed to a 31% increase in operating profit ($US$17 billion). These numbers alone are exceptional, particularly given the mature nature of the business, but a closer look showing some astonishing results.
The groups Azure division, being the cloud computing tools associated with Office 365, grew 50% in a single quarter, yet still represents just 20% of the cloud computing market. The group’s derided investment in social platform Linked In continues to move from strength to strength, adding 25%, with the group’s oldest Productivity Division, included Office, growing revenue by 23%.
Finally, their gaming division, which includes XBOX content, services and hardware grew 34% in the quarter, and the associated advertising 17%, despite some strong comparables in early 2020.
Apple Inc. (NYSE: AAPL), which now boasts a market capitalisation of US$2.2 trillion, delivered what has been referred to as a ‘blowout’ result on the back of stronger than expected iPhone sales. Amid concerns that higher cost products and a close ecosystem would impact on growth, the company reported a 54% increase in revenue to US$89.6 billion in the quarter, with iPhone sales benefitting from new 5G technology to jump 66% in just three months.
It doesn’t end there, iPad and Mac sales nearly doubled, increasing 78.9% and 70.1% respectively, with the ‘wearables’ division delivering a pedestrian 24% by comparison. Despite increasing competition and a global chip shortage, the company saw profit margin increase to 42.5% from 39.8%, a level that nearly any business in the world would dream about. Such was the strength that the dividend was increased 7% and the company now plans US$90 billion in buybacks.
Amazon Inc. (NYSE: AMZN) expects the online trend to continue even as quarterly revenue has breached $108.5 billion for the second quarter in a row. This result was 44% over the previous year and highlights the fact that the move to online shopping is going nowhere any time soon. The group’s continued expansion into cloud computing, offering both the hardware and software required for enterprises of all different kinds to store data and manage their businesses in the digital world, remains a success with Amazon Web Services growing 32% to US$13.5 billion. Both of these were shy of the growth coming from the group’s advertising and ‘other businesses’ which grew 77%.
Facebook (NYSE: FB) followed Apple’s lead delivering a stunning 48% growth in revenue to US$26.2 billion as advertising sales continue to boom. The group’s mission for global domination has slowed, but even the 10% increase in monthly active users to 2.85 billion, blows away the returns of many fast-growing Australian businesses. The group reported that the price paid per ad on the Facebook and Instagram platforms increased 30% in the quarter, showing the almost untapped upside as more people rely on the platform for everything from news to shopping.
If you needed any further evidence that the future is ‘growth’, Alphabet (NYSE: GOOGL), reported its most profitable quarter ever. Profit exploded by 160% hitting US$17.9 billion as more people moved online and advertisers were forced to chase them. This profit growth came from operating leverage, with revenue increasing a more conservative 35%, but continuing to benefit from the groups 92% market share in the search engine market.
Every major business unit grew in excess of 30%, with Search and Networking up exactly this amount, Cloud services 46%, You Tube ads 49% and other investments like the recently listed UIPath jumping 46% on recent revaluations. What is most impressive though, is the emerging opportunity set. According to management some 80% of all searches are still not being monetised.
If you needed a stronger case to retain or increase your exposure to ‘growth’ stocks, it was on show in the last week of April for all to see. When we look back ten years from now, I have little doubt that it will be the likes of Apple, Amazon, Alphabet and Facebook, among many others, that will have driven the bulk of returns for portfolios.
