Tech investors may be overvaluing moats

Technology investing is mostly about carving out a business that can’t be copied and reaping monopoly-style margins. Investors seem to think Microsoft and Apple have done this, but they may be overvaluing the moats.

Over the past year, Meta Platforms and Netflix valuations have been pounded as competition in advertising and video streaming has caused investors to reassess growth prospects. Meta’s stock, for example, has lost half its value since the start of 2022 as tech giants Amazon.com and Apple are expanding fast in advertising. The rise of TikTok makes the walls surrounding ad-dependent social networks in particular look flimsy read more . Similarly, the growth of streaming services from Apple, Walt Disney and others have slowed subscriber growth at Netflix to a crawl and pressured margins.

Investors have fewer worries 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 is increasingly inconceivable to think that users will ditch their iPhones. And it’s credible to think the $2.5 trillion company’s Chief Executive Tim Cook will have success selling more advertising and financial services to its customers. It’s even harder to imagine companies abandoning their workplace software, run by Microsoft, which, for example, holds 85% of the market share in U.S. public sector productivity software, according to Omdia.

And yet valuation multiples reflect these relative expectations, and then some. The stock price of Meta has corrected so much, its enterprise value is now worth less than 4 times estimated revenue for the next 12 months. Five years ago, that 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. Meantime, Apple, at 6 times, is twice its valuation from five years ago. Likewise, Microsoft’s multiple has risen 60% to over 8 times.

The buffers for the latter two companies are assailable. Rivals still want to steal customers, antitrust regulators can’t be dismissed entirely, and the biggest threat – these firms miss out on a market shift as tech advances – remains. While moats protect against rivals, they may do little against a recessionary wave that smashes earnings in the sector overall. Technology investors may be right on their assessment, but wrong on the way they are valuing it.

Microsoft is scheduled to report quarterly earnings after the close of the market on July 26. Analysts expect the firm earned $2.30 per share, compared to $2.17 a year ago, according to Refinitiv.

Apple is scheduled to release 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. Reuters