We naturally think of ‘investment tips’ as being for less well-known companies that are about to take off. Not many would think of the suggestion to buy one of the world’s biggest companies by market capitalisation as much of a ‘tip’. Yes, a huge, successful corporation everyone has heard of might be a relatively safe bet that provides decent returns, but it’s never going to be one of the star performers in a portfolio, right?
Most of the time that response is probably justified. The biggest companies are a stabiliser in a stock market portfolio, not those that expected to grow exponentially, or even particularly strongly. Good dividends are the name of the game. However, a couple of the biggest and best known stock market-listed companies in the world today are thought by some analysts to be just scratching the tip of the iceberg in terms of how big they might eventually become.
One of those is Alphabet, Google’s parent company. After releasing its third quarter results yesterday, which comfortably beat analysts’ consensus forecasts, shares in the company rose 3% in after-hours trading to take them past $1000 for the first time. Alphabet also becomes the second U.S. company, after Apple, to hit an overall market capitalisation of over $700 billion. Its shares have gained 26% so far this year.
At present, the lions’ share of Alphabet’s revenue comes from advertising on Google, whose dominance of the search engine market doesn’t look like ending any time soon.
More interestingly, revenues being generated from Alphabet’s quickly growing cloud computing business are growing strongly and this market is expected to grow significantly in coming years with the company strongly positioned to be one of the dominant players. Microsoft’s cloud computing unit Azure also doubled its revenues this year, significantly ahead of forecasts.
Elsewhere, criticism that has come Alphabet’s way from shareholders has been around the amount of money the company is investing in projects grouped together in its ‘other bets’ unit. These include hardware such as smartphones and tablets as well as IoT (Nest), self-driving vehicles, internet-beaming balloons and life sciences.
But it is exactly those investments, as well as cloud computing, that some analysts may hold the key to future value potentially far beyond what has been seen so far. The resources that Google has behind it and its track record in innovation should give it a good chance of becoming a dominant force in potentially huge new markets such as driverless cars and Internet of Things, which is the term that refers to ‘smart’ products connected to the internet.
Another huge company to deliver impressive results yesterday and see an already giddy share price soar some more is Amazon. Initially an online e-commerce site for books when first launched, Amazon is now one of the biggest 10 retailers in the world by turnover. While Chinese e-commerce rival Alibaba is catching up quickly on Amazon’s market capitalisation it is the company’s other plays that may propel it into the share price stratosphere in coming years. It’s moving into the groceries business through AmazonFresh and the acquisition of Whole Foods and investing heavily in video content with the aim of competing with Netflix and HBO in the online streaming market.
Amazon is also, it’s starting to not look like a coincidence, a big player in the cloud computing market. Amazon faces competition from WalMart, the world’s largest retailer by sales, in the ecommerce arena. The bricks and mortar retailer are investing billions into expanding their online presence but few would bet on Amazon’s far greater e-commerce experience meaning they come out on top. If Amazon makes a success of its venture into home-delivery groceries, though, that could be the real value driver of the company a decade from now.
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