Big tech companies could surpass $ 100 billion in free money in five years

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If equity investors appear worried, it may be because a long period of easy profit growth for US companies is coming to an end. Meanwhile, there’s a historic footnote: Four US tech giants may soon pass


Saudi Aramco

become the world’s most successful businesses, starting with one in a matter of weeks.

I plan to feign enough outrage not to clash with growing anti-Plutocratic sentiment, while quietly supporting the home side.

First of all, the large market. Third Quarter Reporting Season for


S&P 500

index companies are stepping up a gear next week with reports from more than half a dozen major banks. Covid has shattered a long-established pattern where analysts have lowered estimates leading to the reporting deadline and companies have announced upward “surprises”. For five consecutive quarters, estimates have risen instead of falling ahead of earnings season, and for the past four, companies have consistently beaten them. This is because the strength of consumer spending during the pandemic was truly surprising.

But the trend is slowing down and could end. In the third quarter, earnings estimates for the S&P 500 rose only 2.9%, less than half the increase of the past two quarters. And broken down monthly, they increased by 3.8% in July and August, then fell by 0.9% in September. It’s not a big drop, but it’s the biggest since June 2020, before vaccinations started to make a difference.

This raises the question of whether inflation and shortages will undermine growth around the same time that easy comparisons to the hard-hit quarters of Covid come to an end. In the last quarter, profits rebounded by more than 80%. As it stands, they are expected to rise 28% in the third quarter and 22% in the fourth, before slowing suddenly to 6% and 4% growth in the first two quarters of next year. If the estimates fall below, equity buyers may lose their enthusiasm, with the S&P 500 valued at 20 times next year’s earnings.

Then again, interest rates close to zero have persuaded investors to pay remarkable prices for assets with no profit. If Bitcoin is worth its current $ 55,000, who can say the S&P 500 isn’t a good deal?

Now Big Tech. October 28,


Apple

(ticker: AAPL) will release results for its fiscal year ending in September, and it could post free cash flow in excess of $ 100 billion. The only company in this league is the energy monopoly Saudi Aramco (2222. Saudi Arabia). Within three years, Apple could be joined by


Microsoft

(MSFT),


Amazon.com

(AMZN), and


Alphabet

(GOOGLE).

I realize that America’s tech titans are facing a popular backlash. I am as outraged as anyone at the power these thief barons have accumulated by delighting me with discounted parcel deliveries, instantly answering all my questions online, and putting in a workstation, entertainment center, and lab. photo in my pocket.

But if we compare, Aramco is a price collusion that has contributed about 4% of the planet’s carbon dioxide emissions over the past half century, and provides the bulk of the funding for the family that controls what. Freedom House calls the world the seventh least free country. I’m no expert on how the ethics and industry complex counts points, but I’m pretty sure a few of these warrant inferences.

I want to be fair: it says on page seven of the annual report that “Aramco recognizes that environmental, social and governance (ESG) factors are a growing priority for investors today”. But if I hang in there, page three is devoted to a photo of the crown prince, who, according to the US Central Intelligence Agency, ordered the murder of a dissident journalist in 2018. The kingdom denies any involvement.

But enough has been said about E, and S, and G, and whatever category the latter belongs to. My goal here is profit. There are only two companies that can be said to have made $ 100 billion in a single year, and one doesn’t count.


Vodafone Group

(VOD) is a


British Telecom

whose greatest financial pride over the past 25 years is to have held a stake in


Verizon

Wireless for 15 of them. It was sold in 2014 to Verizon and recorded a massive gain.

Not to mention Vodafone is leaving Aramco, which earned $ 111 billion in 2018 from its core business, with a boost from the oil price hike and a reduction in the tax rate paid to the Saudi government from 85% to 50% before an initial public offering at the end of 2019. offer.

After a drop in Covid for crude oil, prices have now recovered and Aramco is expected to make profits over the next four years which hover between $ 102 billion and $ 111 billion. The ultimate price for businesses is not profits, but rather the free cash flow, real and usable cash flow of businesses after all costs have been paid. For Aramco, this measure is a little lower, due to the high capital expenditure. We see it approaching but not exceeding $ 100 billion in the years to come.

If Apple’s distant forecast is to be believed, this will produce minimal free cash growth from here. But the rest of the group will see rapid increases for years to come. Microsoft is starting from a base of $ 56 billion for its year ended in June, and Alphabet, from an estimate of $ 68 billion for this calendar year. Amazon is on a spending tear this year, but next year’s free cash is pegged at $ 50 billion, and early estimates for subsequent years put the growth rate at over 40%.

What these companies have in common is that analysts on average predict that they will hit $ 100 billion in free cash flow by 2024. We’ll see if that materializes.


Facebook

(FB), the most despised giant at the moment, and perhaps for good reason, is a relative runt down here, with available cash only expected to barely exceed $ 70 billion by then.

It is just as well. Four Aramcos is a lot. Five seems excessive.

Write to Jack Hough at [email protected]


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