Tech investors may be overvaluing the moat

The logos of mobile apps, Google, Amazon, Facebook, Apple and Netflix are seen on a screen in this illustrative photo taken December 3, 2019. REUTERS/Regis Duvignau/File Photo

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NEW YORK, July 25 (Reuters Breakingviews) – Tech investing is all about carving out a business that can’t be copied and reaping monopoly-like margins. Investors seem to think Microsoft (MSFT.O) and Apple (AAPL.O) did, but they may be overvaluing the moat.

Over the past year, the valuations of Meta Platforms (META.O) and Netflix (NFLX.O) have been battered as competition in advertising and video streaming has caused investors to reassess the outlook of growth. Meta stock, for example, has shed half its value since the start of 2022 as tech giants (AMZN.O) and Apple expand rapidly in advertising. The rise of TikTok makes the walls around ad-dependent social networks particularly fragile read more . Similarly, the growth of streaming services from Apple, Walt Disney (DIS.N) and others has slowed Netflix subscriber growth and weighed on margins.

Investors have less to worry about when it comes to Microsoft and Apple. With Apple’s first-quarter market share of North American mobile phone shipments exceeding 50%, according to Canalys, it’s increasingly inconceivable that users will abandon their iPhones. And it’s believable that the $2.5 trillion company’s chief executive, Tim Cook, will succeed in selling more advertising and financial services to his clients. It’s even harder to imagine companies abandoning their work software, run by Microsoft, which holds, for example, 85% of the US public sector productivity software market, according to Omdia.

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And yet, valuation multiples reflect these relative expectations, and more. Meta’s stock price has corrected so much that its enterprise value is now worth less than 4 times estimated revenue for the next 12 months. Five years ago, this metric was 9 times, according to Datastream. Netflix has an enterprise value of 3 times estimated revenue for the next 12 months, half its valuation five years ago. Meanwhile, Apple, at 6x, is double its valuation from five years ago. Similarly, Microsoft’s multiple increased by 60% to more than 8 times.

The stamps of these last two companies are attackable. Rivals still want to steal customers, antitrust regulators can’t be entirely dismissed, and the biggest threat – these companies are missing out on a market shift as technology advances – remains. While the ditches protect against rivals, they may do little against a wave of recession that crushes profits across the sector. Tech investors can be right in their valuation, but wrong in how they value it.

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Microsoft is expected to release its quarterly results after the market closes on July 26. Analysts expect the company to earn $2.30 per share, up from $2.17 a year ago, according to Refinitiv.

Apple is expected to release its quarterly results on the afternoon of July 28. The company is expected to have earned $1.16 per share, compared to $1.30 a year ago.

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Editing by Lauren Silva Laughlin and Amanda Gomez

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