A quiet headwind for mega-cap tech stocks: Morning Brief

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Tuesday Nov 15, 2022

Today’s newsletter is at Sam Rothe author of TKer.co. Follow him on Twitter at @SamRo. Read this and other market news wherever you are Yahoo Finance app.

Every great company would love to invent the next good or service that would become a key driver of sales and profit growth.

Unfortunately, this can be a costly and costly undertaking if your R&D department stinks.

But companies with access to finance have another option: to acquire growth.

Acquiring a business for its intellectual property will almost always cost more than if you had invented it yourself. But product development comes with many costly failures, the same way many startups fail. And so it may actually be cheaper to acquire a business that has established some success.

These transactions can be particularly lucrative if the acquirer has better resources to scale an acquisition target while reducing redundant costs.

Indeed, it helps explain in part how the biggest tech companies in the world have gotten so big. Alphabet, Google’s parent company, hasn’t always owned YouTube, a company that generated $7 billion in revenue in the third quarter.

In a research note published Friday, David Kostin of Goldman Sachs noted that acquisition trends for Apple, Amazon, Microsoft and Alphabet have “slowed sharply.”

These companies continue to acquire many companies – Microsoft said this year it planned to buy video game giant Activision Blizzard for a staggering $68 billion. But the volume of acquisitions has tended to decline in recent years.

Mega-cap tech companies have made half as many acquisitions so far in 2022 as they did in 2014.

“Stricter antitrust control appears to have slowed acquisition activity within the group,” Kostin wrote. “So far in 2022, the four companies have announced just 22 acquisitions, less than half the number from five years ago.”

The higher interest rate environment may not help either, as financing transactions have become more expensive.

Kostin notes that it is “difficult to estimate the role that acquisitions in previous years have played in the sales growth of large technology companies”.

But the slowdown in acquisitions probably isn’t helping growth.

“The single characteristic most associated with large-cap tech stocks — superior sales growth — is gone, at least for this year,” Kostin wrote. “Mega-cap tech companies have generated a remarkably high average annual sales growth of 18% over the past decade…Overall sales growth for mega-cap tech is expected to increase by 8% this year. ..”

Of course, not all acquisitions work. Many turn out to be less profitable than expected, often resulting in large write-downs. And so, not being able to buy a big company isn’t necessarily the worst thing in the world.

Ultimately, the effect of tighter antitrust and higher interest rates may have little impact on the growth prospects of these tech giants. Yet every headwind — even a quiet one like this — makes it harder for these companies to meet investors’ high growth expectations.

What to watch today

Economy

  • 8:30 a.m. ET: Empire manufacturingNovember (-6.0 expected, -9.1 in previous month)

  • 8:30 a.m. ET: PPI Final Demandmonth-over-month, October (0.4% expected, 0.4% in prior month)

  • 8:30 a.m. ET: PPI excluding food and energymonth-over-month, October (0.3% expected, 0.3% in prior month)

  • 8:30 a.m. ET: PPI excluding food, energy and trademonth-over-month, October (0.3% expected, 0.4% in prior month)

  • 8:30 a.m. ET: PPI Final Demandyear-on-year, October (8.4% expected, 8.5% in prior month)

  • 8:30 a.m. ET: PPI excluding food and energyyear-on-year, October (7.2% expected, 7.2% in prior month)

  • 8:30 a.m. ET: PPI excluding food, energy and tradeyear-on-year, October (5.6% expected, 5.6% in prior month)

  • 9:00 a.m. ET: Bloomberg Nov. US Economic Survey

Earnings

  • Home deposit (HD), Walmart (WMT), Advanced Auto Parts (MONKEY), energizing (ENR), Krispy Kreme (DNUT), Tencent Music (TME)

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