Investors love Big Tech right now for the combination of growth, competitive "moats" and fat profit margins. But would their feelings be so strong if tech giants' margins lose a little plump?
One theme in recent earnings from Apple, Google, Amazon and Facebook was rising costs from changes in strategy or the hunt for their next big businesses. This could be savvy investing in the future. But all four are at or near record stock prices, and investors may be disappointed if they're betting on current levels of profitability persisting.
More BusinessDay Videos
Apple jumps, Dow hits record high
Stronger-than-expected sales of iPhones have driven Apple's quarterly revenue higher.
Apple a bit less flush
Consider Apple. The stock touched an all-time high on Wednesday on the heels of strong results. Apple executives are enthusiastic about prospects for its newest products, and the company continues to swim in profit like few others. But Apple is getting a bit less flush.
In its most recent quarter, operating profit as a share of revenue was the lowest in nine years because Apple is splurging more than ever in areas like research and development. Apple's operating expenses in the last 12 months were nearly 12 per cent of revenue, the highest per cent age in seven years, Bloomberg data show.
Chief executive Tim Cook has deflected previous questions about what exactly Apple is spending money on, but he did tell analysts on Tuesday that the company is "making a big investment" in technology for autonomous systems including driverless cars.
That project and whatever else is brewing in Apple's secret laboratories could be the next big things. Or not. Either way, shareholders are picking up the cheque now for investments that may not pay off for years.
Amazon spends up
At Amazon, shares fell last week after investors realised (belatedly) that profits aren't going to suddenly rain from the company's Seattle headquarters. Spending on things like merchandise warehouses, web video programming and computer data centres slimmed its operating profit margin to a tiny 1.7 per cent .
The spending is even more flush than it appears. Unlike its peers, Amazon.com also expands its warehouses and data centres through capital leases, and when those costs are included, Amazon's free cash flow was just $US1.5 billion in the last 12 months. That means out of every $US1 in cash coming into Amazon, it's left with 1¢ after accounting for all its cash expenses. That's not much.
![Apple chief executive Tim Cook was talking up growth.](http://web.archive.org./web/20170807131129im_/https://www.fairfaxstatic.com.au/content/dam/images/g/v/g/z/x/e/image.related.articleLeadwide.620x349.gxp1my.png/1501820256344.jpg)
Amazon hasn't said much about its pending acquisition of Whole Foods, but it's safe to guess that will require a spending splurge, too. It isn't cheap to fulfil the boundless ambitions of chief executive Jeff Bezos. After the earnings report, Wall Street scaled back its expectations of Amazon's profits for the next couple of years.
Google partners up
Facebook and Google tend to have high profit margins, but even their businesses are shifting in ways that change this.
Google's parent company, Alphabet, is handing over growing chunks of its revenue to partners like the companies that make YouTube videos and owners of web browsers such as Apple that provide portals for Google searches.
Google in the second quarter handed over more than 22 per cent of its revenue to these partners, the highest share since 2014. Of course, Google's revenue is growing quickly from ads in YouTube videos and mobile searches, but that still means each dollar of future sales comes with thinner margins. Its profit margin in the first half of this year was 26.5 per cent, compared with 31 per cent in 2011.
Facebook's mission
Facebook's mission to become a TV-like destination will squash its margins, too. For now, the company pays basically nothing to keep users hooked on baby photos and posts about Donald Trump. That's changing. As Google did, Facebook is planning to share more revenue with companies that agree to make videos for its news feed.
Video ads "almost certainly will be a lower margin source of revenue than the current thing that we do", Facebook chief executive Mark Zuckerberg told analysts last week. And costs to start TV-like programs on Facebook are also hitting the company's bank book this year.
These companies' absolute profits are all still climbing, and that may matter more to investors than their margins. Still, I'm not sure investors have come to grips with the possibility that Big Tech may have permanently lower-margin futures.
Shira Ovide is a Bloomberg Gadfly columnist.