Big Tech stocks: What will they face in 2022?

Canary Wharf London cityscape at night with HSBC building
Josh Warner
By : ,  Market Analyst
This article is part of our 2022 Global Market Outlook collection, where we highlight the key themes, trends, and levels to watch on our most traded products. Please visit our 2022 Outlook hub page to view them all.

 

What happened to Big Tech in 2021 and what will they face in 2022?

Let’s have a look at some of the key Big Tech trends that emerged in 2021 and what could be in store for 2022.

 

Will Big Tech see slower growth after a bumper year of earnings?

Big Tech has reported record sales and earnings this year as the pandemic shifted our lives online and accelerated the digital transformation of business. There has been an eruption in demand for everything that Big Tech dominates in – whether that’s smartphones and computers, gaming and video entertainment, digital software and cloud computing, or social media and ecommerce.

Most of Big Tech has seen revenue growth accelerate in 2021 but analysts are expecting this to slow in 2022 as the pandemic-induced boom unwinds.

Revenue Growth

2020

2021E

2022E

Apple*

5.5%

33%

4.3%

Amazon

38%

22%

18%

Alphabet

13%

39%

17%

Meta

22%

37%

19%

Microsoft*

14%

18%

17%

Netflix

24%

19%

15%

 

More importantly, the brakes are also set to be put on earnings growth in 2022. Apple, Alphabet and Meta are all forecast to deliver tepid single-digit EPS growth in 2022 after years of delivering impressive double-digit growth. Amazon, having invested heavily and ramped-up spending to capitalise on new opportunities emerging from the pandemic, is expected to see EPS fall in 2021 before rebounding in 2022, while Microsoft and Netflix are both set to see a significant slowdown.

EPS Growth

2020

2021E

2022E

Apple*

10%

71%

2.3%

Amazon

82%

(2.4%)

26%

Alphabet

19%

86%

3.2%

Meta

57%

38%

2.7%

Microsoft*

14%

40%

18%

Netflix

47%

77%

23%

(*The 2021 figures for Apple and Microsoft are actual growth figures reported in their most recent financial years)

 

Will the chip shortage, supply crunch and inflation improve in 2022?

The seismic shift in demand for tech – twinned with lockdown-fuelled disruption - has been so great that it has caused a global shortage in semiconductor chips. That has meant supply of hardware from iPhones and tablets to Xbox gaming consoles and PCs has outstripped demand this year. The chip shortage will continue as we enter 2022 but there are signs that the chip shortage could start to ease in the summer of 2022 and that global chip fabrication capacity will be over one-third higher at the end of the year than at the end of 2020. The coronavirus continues to pose a threat, however, as new variants or problems with vaccination efforts threaten to cause more disruption for chip factories like it did in 2021.

Read more: Top chip stocks to watch

The problems stemming from the wider supply chain crunch, caused by an array of reasons from labour shortages to rising costs, could linger for longer as it is clear there is nothing transitory to inflation and no quick fix to help companies that are fighting for workers and resources.

 

Will regulatory pressure continue to build for Big Tech?

Meanwhile, regulation will remain a key theme for many members of Big Tech as governments both at home and abroad continue their attempts to loosen their stranglehold over key markets. The largest – Apple, Amazon, Alphabet, Meta and Microsoft – have all been hit with fines or had fresh investigations launched into them during 2021 as regulators probe their dealings in everything from their M&A activity and how they pay tax to how they handle rapidly-growing amounts of data and distribute content. The majority of investigations have been launched over concerns that Big Tech is too dominant and leverage their positions to squash or swallow-up smaller rivals. For example, it is thought up to 90% of global digital advertising expenditure outside of China goes to Alphabet, Amazon and Facebook alone. Half of the global cloud computing market is controlled by Amazon and Microsoft, and Apple and Alphabet own the growing App Store space on iPhones and Androids.

Regulatory pressure has been building for years and the debate over how to tackle the dominance of Big Tech continues to rage on. Some are calling for them to broken-up, while others are more focused on getting them to pay more tax. Either way, regulation will undoubtedly tighten over the coming years, but the pace of change is still unclear. One immediate area where Big Tech could face trouble is in M&A, as regulators start to block deals in order to improve competition and prevent Big Tech expanding their monopoly.

 

Will Big Tech spark new growth catalysts in 2022?

Big Tech has continued to experiment in new areas and provide us with an idea where future growth catalysts could come from. We have seen Meta and Microsoft lead the charge in the new metaverse space, which brings augmented reality into play. We have seen payments become a fierce battleground as Big Tech looks to cut out middlemen, while some have also tinkered around with the possibilities offered by cryptocurrencies and new digital products.

With Big Tech’s growth expected to slow in 2022, investors will be hoping new catalysts can emerge to reignite their prospects. The fundamentals remain strong, but Big Tech knows it cannot maintain the stunning levels of growth investors have become accustomed to without pursuing new avenues. The electric vehicle space is a prime example of a new opportunity appearing on the horizon. Apple has been working on a top-secret electric car project for years, Amazon is the largest shareholder in Rivian, Google has Waymo, and Microsoft has its fingers in a number of electric vehicle ventures including self-driving firm Cruise.

Read more: EV stocks: what will they face in 2022?

 

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What will Big Tech stocks face in 2022?

Let’s have a look at what Apple, Amazon, Alphabet, Meta, Microsoft and Netflix could face over the coming year.

 

Apple

Apple shares have hit fresh highs this year and the company remains the most valuable publicly-listed stock, reclaiming its title after briefly losing it to Microsoft. The company is now worth some $2.87 trillion and likely to become the first to breach the $3 trillion mark if it can keep up the momentum. It first hit the $1 trillion mark in August 2018 and $2 trillion in August 2020. 

Revenue and earnings growth is expected to slowdown markedly in 2022 after booming in 2021, more so than any of the other members of Big Tech. With this in mind, investors will be hoping for some new growth catalysts in 2022. This could entail a bigger push into advertising and payments, or some sort of recognition of its electric car plans.

Apple ($)

FY2019

FY2020

FY2021

FY2022E

Revenue (bns)

260.2

274.5

365.8

381.6

EPS

2.97

3.28

5.61

5.74

(Source: Reuters, financial year runs until the end of September)

If the past is anything to go by, we will have a new iPhone and possibly new products unveiled in the second half of the year. With the chip shortage likely to remain a problem for at least the first half of 2022, there is a risk that more people will delay upgrading to the iPhone 13 if they can’t get their hands on it and wait for a new model. It is safe to say demand won’t be an issue, especially as 5G gains more traction, but supply will be a key factor in deciding how hardware sales fare this year. It will also be interesting to see how if Apple’s efforts to take more control over semiconductors will pay dividends after it dumped Intel this year for its own M1 chips.

Services, spanning its App Store and subscription streaming services to news, Apple Pay and iCloud, are regarded as key to Apple’s future. It is also seen as being the primary growth catalyst in 2022, with analysts forecasting Services revenue will grow over 15% compared to a tepid 2.6% growth in products. Expect the game of tug-o-war to continue between Apple and app developers to continue as both battle for the growing amount being spent on Apps and digital products.

 

Amazon

The company’s position as the leading ecommerce platform has reaped benefits during the pandemic as shopping shifted online, while demand for its variety of services including cloud computing and entertainment streaming services has also increased to fuel record revenue and earnings this year – the first under new CEO Andy Jassy, who started a new era for the business following a 27-year reign under Jeff Bezos.

Read more: Who is Amazon’s new CEO Andy Jassy?

On the product side, Amazon has battled to navigate several elements of the supply chain chaos to has plagued markets this year, from labour shortages (exacerbated by labour union disruption) to rising fuel costs. Its scale has meant it has weathered the storm better than most so far, but a recent slowdown in late 2021 has shown it is not immune to the crunch or inflation and profitability is expected to come under strain as costs continue to rise. The fact Amazon has decided to launch a number of physical bricks-and-mortar stores this year in groceries and general merchandise brings opportunities but also extra costs and lower margins.

With that in mind, higher-margin services will be key catalysts in 2022. Notably, services have become more important for Amazon in 2021, with revenue becoming broadly split between services and product sales. This trend will continue in 2022 and we could even see services contribute the bulk of revenue for the first time. Amazon’s subscription service should gain further momentum considering the strength of its Prime offering and video content should improve following the acquisition of MGM.

Cloud computing unit AWS will continue to deliver the bulk of profits in 2022 and Amazon is likely to hold its extensive lead over its rivals, but investors are wary that some competitors like Microsoft and Google are catching up, albeit slowly.

Still, Amazon has been the worst-performing Big Tech stock in terms of share price gains in 2021, rising a mild 9.3% as it has struggled to find higher ground since peaking back in July. That is partly because it makes less in earnings than other Big Tech as it continues to prioritise topline growth and investing heavily to enter new markets. Amazon is the only member on this list expected to see earnings fall in 2021 - but it is forecast to deliver the fastest EPS growth among Big Tech in 2022.

Amazon ($)

2019

2020

2021E

2022E

Revenue (bns)

280.5

386.1

470.6

554.3

EPS

23.01

41.83

40.82

51.46

(Source: Reuters)

After Meta, there is an argument that Amazon is facing the greatest regulatory pressure. Most of the concerns relate to Amazon wielding its size and data to gain an unfair advantage over smaller retailers or forcing them to use its wider array of services such as its delivery systems. Amazon has been singled-out by some US politicians as a candidate to be broken up, although that has failed to ignite the imagination of other policymakers so far.

 

Alphabet

Alphabet does a better job of staying out of the limelight than some of its Big Tech peers, but it has quietly outperformed its rivals this year. Alphabet shares are up over 70% since the start of 2021. That is also well ahead of the 27% increase delivered by the Nasdaq-100.

Every single part of Alphabet’s sprawling business has seen an explosion in demand since the start of the pandemic. YouTube became more popular than ever and is still the number one video streaming platform. Demand for digital ads has exploded, our heavy reliance on Google Search has only increased over the past two years, and Google’s cloud computing operations, while still small compared to Microsoft and Amazon, is gaining ground and showing huge potential.

There is no doubt that the fundamentals remain strong for Alphabet, but analysts are expecting the foot to come off the gas over the next 12 months following a year of record revenue and profits, with EPS forecast to grow just 3.2% in 2022.

Alphabet ($)

2019

2020

2021E

2022E

Revenue (bns)

161.9

182.5

254.1

296.8

EPS

49.16

58.61

108.85

112.3

(Source: Reuters)

 

Meta

It has been a whirlwind of a year for Facebook. The company formally flipped the switch on its pivot to the burgeoning opportunities offered by the metaverse by changing its name to Meta. Some believe the metaverse will be a slow burner in terms of earnings and that it could be years before companies start to see any form of return. Still, investors are keenly looking for news on its experiments with augmented reality and will also be eyeing any updates on new initiatives considering the firm has dipped it toes into several exciting areas such as cryptocurrencies.

But the rebrand was about more than just signalling a new direction for the company. The company’s reputation has taken a hit this year, although it has not been big enough to deter users or businesses from its platforms. For example, Instagram came under fire from allegations from whistle blower Frances Haugen that it prioritises profits over safety, prompting it to place plans to launch an Instagram for kids on the back burner. Facebook continued to grapple with criticism over third-party content on its sites, and the encryption chat services offered by WhatsApp continued to stir-up controversy.

Meanwhile, a major outage knocked Facebook, Instagram, Messenger and WhatsApp for around six hours back in October. This was significant as it showed vulnerabilities of Big Tech and how one issue can bring an entire ecosystem down, and it also highlighted how reliant people and businesses are on Meta’s platforms. We also saw advertising revenue – Meta’s bread and butter – also take a hit this year alongside other social media platforms including Snap and Twitter after Apple made changes to its iOS operating system. The battle for advertising will heat up in 2022 as each member of Big Tech vies for a larger slice of the pie as businesses are expected to ramp up spending to capitalise on increased demand as the global economy recovers from the pandemic. The same goes for the social media space as rivalry with the likes of TikTok and Snapchat intensifies, particularly for younger audiences.

Meta is expected to deliver around 37% to 38% growth in both revenue and earnings this year as more advertising dollars have shifted online. However, analysts expect revenue growth to slow in 2022 and for EPS to rise by just 2.7%.

Meta ($)

2019

2020

2021E

2022E

Revenue (bns)

70.7

86

117.7

140.1

EPS

6.43

10.09

13.92

14.29

(Source: Reuters)

The recent decision by UK regulators to block and unwind the company’s acquisition of GIF-firm GIPHY has also cast a huge cloud of doubt over Meta’s ability to buy smaller businesses, as well as other members of Big Tech. Big Tech has swallowed up hundreds of smaller rivals and tech startups over the last decade and, convinced this is stifling competition, regulators appear to keen to stop their M&A activity. That could make it significantly harder for Big Tech to buy their way in to new industries or gain advantages by buying companies with new technology, which could increase competition and force Big Tech to build more innovations from the ground up.

Read more: What companies does Meta own?

Read more: What companies does Apple own?

Read more: What companies does Amazon own?

Read more: What companies does Google own?

 

Microsoft

Like its peers, the pandemic has sparked increased demand for all of Microsoft’s products, including its Office software, Windows hardware, Xbox gaming systems and content, and its server and cloud operations. This has led to record revenue and earnings and pushed the stock to new all-time highs, with shares up over 50% since the start of 2021.

Its cloud computing unit Azure has continued to grow market share at the expense of other players. Data from Statista shows Azure’s market share has risen from 13.7% in late 2017 to over 21% this year, while the lion share controlled by market-leader Amazon has remained broadly stable at 32%. Still, the main battle will still be between these two titans going in 2022 as the digital transformation accelerates and Azure is forecast to remain the fastest-growing part of Microsoft’s business in 2022.

The new Xbox (alongside its rival the PS5) is still struggling to meet demand because of the chip shortage and markets will hope this will begin to ease in 2022. That could also bode well for its other array of Windows hardware, which has experienced some softness due to supply constraints at a time when demand for PCs has spiked. Meanwhile, LinkedIn has proven increasingly popular as job markets continue to undergo a seismic shift. Notably, the service was pulled in China this year after failing to fit-in and is being replaced with a new job-posting service in 2022.

Microsoft also refused to let Meta own the metaverse space after swiftly launching its own platform built around Teams and office functions, with some hoping this could become a reality within a matter of two to three years.

Microsoft’s financial year runs until the end of June and analysts believe revenue growth in the current year will remain broadly stable from the 18% growth booked in the 12 months to the end of June 2021. EPS growth is expected to deaccelerate to 18% from 40%, but that still looks impressive compared to Apple, Alphabet and Meta.

Microsoft ($)

FY2019

FY2020

FY2021

FY2022E

Revenue (bns)

125.8

143

168.1

196.8

EPS

5.06

5.76

8.05

9.49

(Source: Reuters, financial year runs to the end of June)

 

Netflix

Netflix has suffered uneven growth over the past two years. More people have signed-up during periods when they were told to stay at home and less when restrictions have been eased. For example, it added nearly 26 million subscribers in the first half of 2020 when the strictest stay-at-home orders were in place, but just 5.5 million in the same period in 2021. Still, if you smooth out subscriber additions since the start of 2020, growth has largely stayed in-line with what it was delivering before the pandemic.

This has been reflected in its share price. Netflix shares have risen over 16% this year, having lost some steam after soaring over 65% in 2020 when demand spiked in the first half during lockdowns, but they still hit fresh highs in November.

Forecasts currently expect Netflix to add 18.6 million subscribers in 2021, down from 36.5 million in 2020. But Wall Street believes there will be an acceleration next year and that Netflix can add 24.6 million. We saw growth start to pick up again in the third quarter and additions are forecast to almost double in the fourth quarter compared to the third, setting a buoyant tone as we enter 2022. Still, there will be concerns that Netflix could lose appeal again once the economy starts to fully reopen.

Netflix is forecast to see revenue growth slow to 15% in 2022 from the 19% expected in 2021, while the rise in EPS is set to be considerably slower following a bumper year:

Netflix ($)

2019

2020

2021E

2022E

Revenue (bns)

20.2

25

29.7

34.1

EPS

4.13

6.08

10.75

13.18

(Source: Reuters)

The fact productions are largely back up and running after suffering significant disruption last year is one reason to believe Netflix can keep its audience engaged. Netflix’s slate has improved in the second half of 2021, underpinned by the huge success of South Korean hit Squid Game, and that trend should continue in 2022 so long as the coronavirus doesn’t throw any more curveballs at the industry. That could also prove vital as competition with Disney, Amazon, Apple and Comcast intensifies and content spending budgets increase. Markets should expect 2022 to be a bumper year for content. The fact Netflix has found huge success tapping into previously underappreciated markets like foreign films and anime should install some confidence, as should the fact it continued to dominate at the Emmy awards thanks to the huge popularity of titles like Bridgerton, The Crown, and The Queen’s Gambit.

Netflix also took a tentative step into the world of gaming this year, launching its first free titles for subscribers to play. However, management have said this will be a slow and steady journey and played down the idea it will provide a significant catalyst anytime soon. There is also the chance we could see Netflix make some moves in the M&A market as demand for studios and content continues to increase.

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