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The 5-Horse Race in Tech

Posted on Monday, Sep 26th 2016

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Tech has become a 5-horse race: Google, Apple, Facebook, Amazon, and Microsoft being the five horses fighting for dominance of Techdom. Google dominates Search and Mobile; Apple dominates mobile; Amazon dominates Commerce and Cloud; Facebook dominates Social; and Microsoft, despite its size, dominates nothing.

Amazin Amazon

Amazon (NASDAQ: AMZN) has been performing incredibly well. It has thrown out doubts about its profitability with five straight quarters of profits. Its revenue in 2015 grew 20% to $107 billion and its stock is trading around $804 with market cap of $381 billion.

It has seen great success with AWS, which drives its profitability. It is about a $10 billion business with a 23% operating margin. AWS is the leader in the cloud market with nearly 31% of the global market share, while Google and IBM together account for the next 22% of the market and the next 20 players in the market account for a combined 27%.

Amazon has decimated most of its competition in the e-commerce space. Its fabulous logistics network, wide range of products, and infrastructure have taken out niche players like Etsy. Its Prime membership service has also taken off and Amazon is finally looking at attracting customers even without deals and discounts. Its seamless functioning has in fact made it my first choice for online shopping.

Other investments like its Echo voice-activated personal assistant are also paying off. It is also offering a monthly subscription for the Prime videos a la Netflix. Bottom-line, Amazon has not been taking it easy. It is constantly looking to up its game. And that’s what makes it a winner.

Unstoppable Facebook

Facebook is the undisputed king of social media. And it has made some very noteworthy acquisitions like WhatsApp and Instagram to get there. Facebook, Whatsapp, and Facebook Messenger have more 1 billion active users while Instagram has 500 million users. People send around 60 billion messages every day on WhatsApp and Messenger while 1 billion posts are created every day on Facebook. More than 1 billion people use Facebook Groups. More than 3 million businesses use its advertising products every month and over 200,000 businesses use Instagram for advertising.

It is clearly a winner in mobile advertising, and now it has set its sights on video advertising, taking on Google’s YouTube. Its stock is trading around $127 with market cap of $366 billion. Its revenue in 2015 grew 44% to $17.93 billion and it is aiming to have 5 billion users by 2030.

Alphabet’s Risky Bets

For a long time, Google aka Alphabet (NASDAQ: GOOG) was synonymous with search and then it went on to dominate mobile. It went on to command the same kind of following for its other ventures. It has seven services with more than 1 billion users – Android, Search, Chrome, Maps, Play, YouTube, and Gmail.

Of late, it has been focusing its efforts on the Cloud and the monetization of YouTube. Early this year it launched YouTube Red, its ad-free subscription based offering that also offers original content. It is now working to launch YouTube Unplugged, a service that would offer customers access to a bundle of cable TV channels streamed over the Internet.

Alphabet holds just 6% share of the cloud suppliers market. To acquire a bigger share of the cloud market, Alphabet is investing in integrating machine learning and artificial intelligence applications with its Google Cloud Platform.

Alphabet has been doing quite well. Its revenue in 2015 was $75 billion. However, what could be worrying is that it is spread out thin, especially with bets like Self Driving Cars.

Its stock is currently trading around $785, close to its 52-week high with a market cap of $539.5 billion.

Apple Declining

Apple (NASDAQ: AAPL) has given us some exceptionally well-designed products like the iPhone. And it has a huge fan following. Its revenue in 2015 was $234 billion, up 28%. Its stock is currently trading around $114 with a market cap of $616 billion. It is the most valuable tech company. However, in the five tech horses we are discussing here, I find it to be the weakest.

Sure it had some amazing products. But the iPhone, iPad, and even Mac revenue streams are slowing down. It now needs to relook its strategy. What is the next major category that can deliver serious growth? Cars? TV? None of those are necessarily in its sweet spot nor are they easy markets to crack.

Microsoft, the Dark Horse?

Despite its size, Microsoft (NASDAQ: MSFT) currently dominates nothing. Its revenues fell 9% over the year to $85.3 million and its stock is currently trading around $57 with a market cap of $447.5 billion.

While Amazon’s AWS may be the market leader within cloud service providers, Microsoft is also making its presence felt. In its latest quarter, Microsoft reported that its Azure cloud services division grew 102% over the year and its commercial cloud segment grew from $8.1 billion a year ago to $12.1 billion in revenues.

What makes Microsoft interesting is its biggest ever acquisition – that of LinkedIn for $26.2 billion, which gives it a key position in Social. But Microsoft’s endgame is Cloud and it now needs to fortify its CRM position and deeply integrate LinkedIn into it. Microsoft was reportedly trying to acquire Salesforce for $55 billion last year, but the $70 billion price tag was too high.

It should look at buying ServiceNow, which is currently trading around $77.3 with a market cap of $12.7 billion. ServiceNow expects to end 2016 with revenues between $1.355 billion and $1.38 billion or a growth of 35% to 37%.

So, though Microsoft might look weak currently, it is taking the right strides to put itself in a strong position. With an acquisition like ServiceNow, it could come out winning in the long run. There are also several other strong cloud businesses that it can acquire to build up a strong portfolio. These include business intelligence and analytics company Tableau (NYSE: DATA) trading at a market cap of $4 billion, data analytics software solutions provider Splunk (NASDAQ: SPLK) trading at market cap of $7.8 billion, and SaaS-based enterprise application services provider Workday (NYSE: WDAY), which is trading at a market cap of $17.8 billion. All these are very much within the reach of Microsoft, which ended the recent quarter with $113.2 in cash and short-term investments.

Photo Credit: Paul/Flickr.com

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