SINGAPORE (May 28): Technology is indispensable in our lives. There is barely a moment when we do not use a smartphone made by either Apple, Samsung, Huawei or Xiaomi. Most of us use Google’s search engine or Gmail regularly. Many of us use Microsoft Word and Excel on a daily basis; and most global corporates use its Azure cloud services. According to KeyBank Research, Amazon Web Services had 62% market share in 4Q2017, down from 68% a year earlier; Microsoft Azure’s market share rose to 20%, from 16%; and Google’s rose to 12%, from 10%.

Amazon had about 310 million active consumers as at 2017; Alibaba Group Holding had 488 million active users as at 3Q2017. Both e-commerce giants have ventured into the physical space, but their battle for customers is being fought online.

During its 1QFY2018 ended March 31 results conference call, Facebook CEO Mark Zuckerberg said 2.2 billion people use Facebook every month and more than 1.4 billion people use it every day. “Our business grew 49% year-over-year to US$12 billion [$16.1 billion],” he said. The number of active Facebook users crossed one billion in 3Q2012. Active users are those who have logged in to Facebook in the last 30 days.

Apple, Alphabet (Google’s parent), Facebook, Amazon and Microsoft are among the top five components of many tech exchange-traded funds. Their performance, coupled with how investors perceive them, and whether investors continue to buy ETFs as a proxy to the sector are likely to affect the performance of the US market.

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Tech giants beat expectations in first quarter

For 1QFY2018 ended March 31, Alphabet beat market expectations when it reported revenues of US$31.1 billion, up 26% y-o-y. Net income rose 25.5% y-o-y to US$9.4 billion, translating into earnings per diluted share of US$13.33.

Amazon, which also beat market expectations handsomely, announced its net sales increased 43% y-o-y to US$51 billion in 1QFY2018, compared with US$35.7 billion 1QFY2017. This included a US$1.6 billion favourable impact from y-o-y changes in foreign exchange rates. Operating income increased 92% y-o-y to US$1.9 billion for the same period, compared with US$1 billion in 1QFY2017. Net income more than doubled to US$1.6 billion in 1QFY2018 versus US$724 million a year ago, translating into earnings per share of US$3.27 (US$1.48 in 1QFY2017).

BI Intelligence points out that almost half of US households now have a Prime (an Amazon unit) membership, diminishing Amazon’s growth potential in the country. India, Southeast Asia and Latin America show tremendous potential, though. Market research shows penetration rates in these areas hover between 2% and 6%. Also, e-commerce in India, Southeast Asia and Latin America are expected to grow at compound annual growth rates (CAGRs) of 31%, 32% and 16%, respectively, through to 2021.

India is seen as having the largest e-commerce potential among large emerging markets. In Indonesia — Southeast Asia’s largest economy in terms of GDP and population — the government is loosening restrictions on foreign investments, and its population is gaining spending power and more access to the internet. Still, doing business in these countries can be difficult. In most emerging markets, infrastructure is underdeveloped and the population is largely unbanked, making digital payments a challenge.

So far, Amazon has launched Prime membership in Singapore, and the move is largely seen as a stepping stone into Southeast Asia.

Microsoft beat estimates in earnings and revenue for 3Q2018 ended March 31, but only modestly. Notably, its Azure cloud services reported a 93% y-o-y growth in revenue. Overall,

Microsoft reported US$26.82 billion in revenues versus consensus estimates of US$25.77 billion. Operating income rose 23% y-o-y to US$8.3 billion, and net income was 35% higher y-o-y to US$7.4 billion, translating into diluted EPS of 95 US cents.

Apple reported quarterly earnings and revenue on May 1 that beat expectations as well, although it sold fewer iPhones than expected. Net income rose 25% y-o-y to US$13.82 billion for 2QFY2018 ended March 31, translating into EPS of US$2.37, versus expectations for US$2.67; revenue rose 16% y-o-y to US$61.1 billion. For 3QFY2018, Apple’s guidance is for revenue of between US$51.5 billion and US$53.5 billion, gross margin of 38% to 38.5%, operating expenses of US$7.7 billion to US$7.8 billion, other income of US$400 million and a tax rate of 14.5%.

Although Apple performed better than expected, it is in the centre of a trade spat between China and the US. According to the Taipei Times, Morris Chang, chairman of Taiwan Semiconductor Manufacturing Co (TSMC), said the Apple supply chain could suffer if a trade war erupts between the US and China. “China does a lot of assembling of final products, so the US-China trade dispute might also affect us,” Chang is reported to have said. China is both a manufacturing base of and a big market for other Apple products such as the MacBook and iPad.

Many Taiwanese tech companies have manufacturing facilities in China. In addition to TSMC, many other Taiwanese electronics firms are part of the Apple supply chain, including iPhone assemblers Hon Hai Precision Industry Co, Pegatron Corp and Wistron Corp; smartphone camera lenses supplier Largan Precision Co; and metal casing maker Catcher Technology Co.

Taiwanese suppliers to Apple are estimated to account for 40% of the Taiwan Stock Exchange’s market capitalisation.

Nobel laureate Paul Krugman points out a different aspect of the “Apple” trade (Krugman was the sole 2008 Nobel Prize winner in Economic Sciences for his analysis of trade patterns and location of economic activity). What producers should care about is not how much they export but how much income they derive from exporting, he says in a recent note. They should care about “income at risk”, not “exports at risk”, he says, as these numbers can be very different.

In the case of US-China trade, “income at risk” and “exports at risk” are very different numbers. As Krugman sees it, the assembly in China of iPhones — which is made out of components from all over the world — accounts for only 3% to 6% of the total manufacturing cost, but the whole price of an iPhone shipped from China to the US is counted as a Chinese export. Krugman says China exports around US$17 billion worth of iPhones to the US each year, but Chinese producers account for only about US$1 billion of the export quantum.

Investing in tech stocks through ETFs

The easiest way to invest in these tech stocks is to consider ETFs, as big-cap tech stocks are major components of the largest US tech ETFs. Trading in US tech ETFs can be done through trading accounts on TD Ameritrade, Saxo Capital Markets or local brokers such as UOB Kay Hian and Maybank-Kim Eng. Some US products that could include ETFs are classified as specified investment products. According to Singapore regulations, financial institutions in the city-state will need to “qualify” retail investors before they invest in SIPs. Accredited investors can invest in all investment products, including SIPs.

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