Investing Tips: 4 Reasons Big Techs can always stay your best pal

Summary

  • The technology industry is full of distinct companies that are best in what they offer along with their larger scale and bargaining power.
  • These big tech firms enrich from network effects with rising number of users who utilise their products/services, which sequentially increases value of the products/services.
  • Large tech companies have been injecting a large number of funds in their businesses via acquisitions with an eye towards diversification of businesses, aiding in distributing risks across different stocks, bonds, etc and gaining a competitive edge.

Big tech companies such as Facebook, Google, Apple, Netflix, Amazon, Microsoft, and many more have been in business from quite a long time. Moreover, they have been swaying on the Nasdaq composite index with their impressive business performances.

Did you read; NASDAQ surged up above 10,000 – Tech stocks setting a new benchmark

It has been observed that whenever one wants to connect with a friend, one instantly logs in to their Facebook account; or whenever one wants to shop online, one places an order within seconds via Amazon shopping app.

In the contemporary world, these big firms with their innovative services have become part and parcel of our lives.

Let us deep dive and look at the four primary reasons how big tech entities are making a huge difference in society indicating that they are here to stay.

Economies of scale: Bigger can be better

"The bigger the better” phrase precisely describes an imperative business reality.

Have you ever wondered why a larger company charges less than a smaller business for a similar product? Well, the idea behind it is, as a company grows, it increases production, causing reduction in cost per product.

On the economic front, it is termed as economies of scale.

As an entity develops, it manufactures more products. Hence the average cost of making each item reduces; consequently, enlarging profit. Economists call this "economies of scale."

Big technology companies possess high bargaining power primarily due to higher availability of suppliers and larger order size.

Big technology companies are often in a position to demand and leverage the size of their businesses against suppliers, leading to weakened bargaining power of suppliers.

Furthermore, whenever a scale is brought onto the table, a business tends to earn more.

In light of the above-mentioned statement, Apple keep many things close and uptight and even has stringent regimes for its developers. However, given the large size of the Company, developers are ready to spend and stay associated with Apple.

Google bought Android in 2005 and has successfully developed Android to become the leading operating software in the smartphone world, and also compete against Apple’s iOS.

Google integrated all its apps and services (Google Play Store, YouTube, Google Maps and Gmail) within Android. This strategy at first allowed Google to execute the utilisation of its services and applications; later on, Google imposed a rule wherein smartphone manufacturers had to necessarily obtain the Android license issued by Google to use these Google Play Services. This strategy allowed Google to foster more revenue streams with Android.

Network effect

Network effect was not actually ‘a thing’ until a wave of technology came into the picture for communication across the globe.

With an upsurge in the number of users, the value of the product or service enlarges, and popular services or products gain an edge.

Let us get back in time and think of the early days of Facebook and LinkedIn. Every new friend or contact on Facebook or LinkedIn made it more valuable to the existing friends or current member.

This is a network effect.

Large technology companies such as Apple, Google, Netflix, Amazon, Microsoft, Facebook and many more are swaying network effects to their advantage.

Google, Amazon, and Facebook utilise direct network effects wherein, each new user of their products is directly influencing the other users of the communication system, thus increasing the value of the product.

On the other hand, a Company like Netflix relies more on indirect network effects.

Are you wondering, how? Netflix’s movie recommendation system advances with more users of a product, which improves experience of the users with the product itself.

Moreover, Amazon’s marketplace attracts millions of users, resulting in the willingness of multiple third-party sellers to work with the e-commerce giant.

Did you watch; Facebook launching 'Shops' on its social Media Platform | Market Update

Ability to invest as the conglomerates have an abundance of funds at disposal

Big tech companies with a larger pool of funds often opt for acquisitions, with an intention to upscale their businesses, stimulate growth and gain competitive advantage.

Quite often, acquisitions come to light with big companies being in a mature phase of their businesses’ life cycle. No matter how good they are at what they do, there is always a need of strategy to grow their mature businesses substantially.

Having said that, acquisitions not only helps in the potential growth of the businesses, it also offers the facility of diversification in the business, which can further aid in spreading their risks across various stocks, bonds, commodities, etc and throughout several duration.

Did you read; Unfazed by the pandemic, US tech giants focus on inorganic growth

Jeff Bezos-led juggernaut, Amazon has had been unstoppable. Amazon has kept tabs on emerging trends and has invested in a diverse range of products, as well as markets. This strategic move of diversification in business has played a big part in transforming Amazon into an internet behemoth it is today.

Over the years, Amazon has led the market with a broadened empire via acquisition of numerous companies ranging from Whole Foods, Zappos, Twitch, Kiva systems, Quidsi and many more.

Despite the fact that the Company is an online platform for the sale of third-party products, it has also emerged as a content streamer and provider of AI-based robotics, financial services via Amazon Pay and cloud services provider via Amazon Web Services.

Google’s phenomenal success is also led by more than hundreds of acquisitions since 2001.

The web giant has over the years acquired several businesses such as Android in 2005, YouTube in 2006, DoubleClick in 2007, AdMob in 2009, Waze in 2013, Looker in 2019 and many more.

A quick fact!

Even though Google Cloud and Microsoft Azure solution are growing exponentially, Amazon, with its AWS (Amazon Web Services) is still dominating the cloud space.

Did you read; E-commerce Titan Amazon shares traded above $3,000; would the rally continue in post-pandemic phase?

Employees love to work for big tech firms

The big technology companies are thriving by attracting, hiring, and retaining top talent.

Attraction and retainment entail a well-thought-out strategic process.

Big tech firms can be visualised as a magnet when it comes to talent pool; they do not face any significant challenge in hiring or retaining talented people.

Finding and retaining talent depends on numerous factors such as how successfully feedback is provided to employees, opportunities for upskilling and mentoring, good work culture and a challenging work environment.

Amazon invested over US$700 million in upskill training programmes for 100k employees across the US for in-demand jobs by 2025.

Over a last couple of years, Google and Amazon have had extended their partnerships with numerous colleges to render credit-bearing versions of their content and credential programs.

Amazon has extended mainly via its Amazon Web Services category including 11 certifications in cloud computing technology.

When economies of scale are coupled with the network effects, they tend to create huge value for the users and the products/services. Furthermore, employees love for their organisation would make the talented pool stick to the firm in the long run.

All these factors boost the confidence of investors and add value.

Do not worry folks, big technology companies are here to stay for a very long time.

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