Apple, Google and the rise of Godzilla tech stocks


We are entering a brave new world here.

Consider the outsized impact Apple and other mega-cap tech stocks like Google (GOOG) and Amazon (AMZN) have on American investing.

While iPhone sales climbed 35% in Apple’s fiscal third quarter, it wasn’t quite enough to meet the expectations of Wall Street analysts.

Right on cue: Apple shares slid 4.2% on July 22 wiping out $32 billion in market value.

 
Tech-stocks

 

Godzilla Stock

Apple’s troubles were felt across the entire universe of US stocks.

That’s because the tech juggernaut is a heavily-weighted stock in the Nasdaq Composite, the S&P 500 Index and, more recently, the Dow Jones Industrial Average.

 

Apple Nation

Apple boasted a market cap of $714 billion as of July 23.

That’s bigger than each of the economies of Switzerland, Sweden, Taiwan and Norway.

If you are a passive investor in an ETF in any of the major indexes, the fortunes of Apple and Google (GOOG), whose market value is $463 billion, are inextricably tied to your portfolio.

 

Mega Stocks

The combined market value of Apple and Google is equal to 147 (or nearly 30%) of the companies listed on the S&P 500.

 

Source: Bespoke Investment Group

Source: Bespoke Investment Group

 

The swings in market values from these mega-cap stocks are remarkable.

On July 17, Google’s shares soared on robust earnings, adding a mind-bending $65 billion to its market capitalization in one day.

 

Big Blues

Contrast these spectacular valuations with a faded tech icon like IBM.

Its $150 billion market cap is sizable, but looks puny in comparison to the Apples, Googles or Amazons (AMZN) ($227 billion valuation) of the world.

IBM is struggling to revamp its hardware and software businesses and become a more cloud-focused company.

 

Revenue Slide

Covestor manager Daniel Beckerman, the President of Beckerman Institutional who oversees the Asset Allocation portfolio, is bearish on Big Blue at the moment.

“I am much less positive on IBM than on Google,” says Beckerman. “It is evident that IBM has been struggling to keep up with technological advancement (in the cloud in particular) and IBM’s revenue has fallen in each of the last four years.”

Another Covestor manager Mark Holder, Chief Investment Officer at Stone Fox Capital Advisors, is more upbeat longer-term.

“While the market is overly concerned by revenue growth that has declined for 13 consecutive quarters, the company will eventually benefit from a reversal in currency headwinds that have hit second quarter revenue by 9%, or $2.1 billion,” he said.

 

Bargain

Holder also points out that IBM now trades at only 10x earnings estimates and the company is using the cash flow to repurchase shares.

The stock will fluctuate in 2015, figures Holder, “but investors get a 3.2% yield to wait for the stock to rebound making it attractive long term.”

 

Takeaway

As the market values of Apple, Google and Amazon surpass the economic output of many nations, the dynamics of the entire stock market are changing.

These mega-ton stocks now have huge pull on the major indexes, especially Apple that’s listed on Nasdaq, the Dow and S&P 500.

Like it or not, we are all tech investors now.

Photo Credit: Yusuke Umezawa via Flickr Creative Commons

Investments discussed are held in client accounts as of July 23, 2015. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable.

Author profile

Xavier Brenner
Xavier Brenner
Xavier Brenner has covered global market, business and economic trends for Interactive Brokers Asset Management since 2013. An experienced financial journalist, Brenner offers analysis and insights on the stories that matter to the discerning investor.