The unrelenting march of technological progress has changed the way people live their lives while upending industries and disrupting the status quo. The personal computer, the internet, smartphones, e-commerce, cloud computing, and social media have been some of the key technologies that have shaped our world in the past few decades.
Companies that have successfully ridden these waves have come to dominate the list of the largest tech stocks. Some have been around for many years, while others have emerged more recently. Some manufacture hardware, like servers, computer chips, networking gear, and consumer devices, while others sell software, or even give it away for free.
The top 10 U.S. tech stocks have a combined market capitalization over $5 trillion, and they generate annual revenues in excess of $1.2 trillion. All are exceptionally profitable, benefiting from competitive advantages derived from some combination of high switching costs, network effects, massive barriers to entry, winner-take-most markets, and powerful brands.
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The 10 biggest tech stocks
The bull market that began after the financial crisis propelled the stock market to new highs, and technology stocks have benefited greatly. A bull market is a period of rising share prices, and the current one has been going on for around a decade.
Many of the largest U.S. companies by market capitalization, or the total dollar value of all outstanding shares, are now in the technology sector, and a few are valued in the vicinity of $1 trillion. Those who invested in the best tech stocks have enjoyed exceptional returns.
These are the 10 largest U.S. tech stocks, as of the end of the first half of 2019:
Net Income (TTM)
1. Microsoft (NASDAQ: MSFT)
2. Amazon (NASDAQ: AMZN)
3. Apple (NASDAQ: AAPL)
4. Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL)
5. Facebook (NASDAQ: FB)
6. AT&T (NYSE: T)
7. Verizon Communications (NYSE: VZ)
8. Cisco Systems (NASDAQ: CSCO)
9. Intel (NASDAQ: INTC)
10. Oracle (NYSE: ORCL)
Data source: Morningstar. Market caps as of June 28, 2019. TTM = trailing 12 month. Net income is on a GAAP basis.
Here's what you need to know about these dominant technology stocks.
Microsoft wasn't the first U.S. public company to be valued at $1 trillion, but it stood alone in the trillion-dollar club at the end of the first half of 2019. The success of Microsoft's cloud computing business, along with the resilience of its Office software suite, helped generate the $122 billion in yearly revenue that has propelled the 44-year-old tech company to the top of the heap.
The cloud era for Microsoft really began when Satya Nadella became CEO in 2014. Nadella moved Microsoft from a Windows-centric company to one that put the cloud and mobile first. Microsoft lost the battle for the smartphone market, but it was able to strengthen its lucrative Office business by treating non-Windows platforms as first-class citizens. The productivity suite is now available on all the devices that people actually use, and the subscription-based Office 365 has been a big success.
Microsoft's Azure cloud platform may be the main reason why Microsoft stock has soared over the past few years. The company still trails Amazon Web Services in terms of market share, but Microsoft has carved out a solid no. 2 position in the cloud infrastructure market. And while AWS is growing roughly in line with the market, Azure is growing much faster. In the third quarter of fiscal 2019, Azure revenue surged 73% year over year.
Microsoft completely missed the mobile market, a mistake that cost the company $400 billion in additional market cap, according to founder Bill Gates. It's not missing the cloud market. How profitable cloud infrastructure-as-a-service will be in the long run, once the market has matured, is unclear. But Microsoft has positioned itself to be a leader for years to come.
The bulk of Amazon's revenue comes from its e-commerce operation, and that's unlikely to change anytime soon. But Amazon Web Services, the company's cloud computing business, has grown into a large tech company in its own right. Over the past 12 months, AWS has generated a staggering $27.9 billion in revenue. And AWS is by far the most profitable part of Amazon's business, with operating margin close to 30%.
The e-commerce business is no slouch, either, particularly the third-party marketplace. While Amazon's direct online sales growth rate has slowed to a bit more than 10%, revenue generated from third-party sellers is expanding at roughly twice that rate. And revenue from subscription services, which includes Prime, is growing even faster.
Amazon has become so big and influential that U.S. antitrust regulators are looking into the company's practices, specifically the interplay between the first-party and third-party e-commerce businesses. These investigations may not go anywhere, but they represent a risk to Amazon's business model.
Another risk is intense competition from traditional retailers that have finally embraced e-commerce. Both Walmart and Target now offer free two-day shipping, subject to order minimums, and Walmart recently announced a limited next-day shipping service that will roll out in 2019. Target has been using its stores to fulfill online orders to great effect, allowing it to offer free next-day shipping for household essentials under its Restock service, and same-day delivery under its subscription Shipt service.
Amazon isn't at risk of losing the e-commerce crown in the foreseeable future, but its dominance may start to erode as retailers increasingly try to undercut the two-day and now one-day shipping offered by Prime. Add to that the antitrust threat and Microsoft's growing cloud computing market share, and it's clear that Amazon has a lot on its plate.
The iPhone has been Apple's ticket to becoming one of the largest tech stocks in the world. While the iPhone's global unit market share is dwarfed by phones running Google's Android, Apple's high-priced phones remain extremely popular, particularly in the U.S. The company sold 217 million iPhone devices in fiscal 2018, good for $167 billion in revenue. Other devices and services accounted for the rest of Apple's sales.
The 43-year-old company's ticket to remaining one of the largest tech stocks in the world is services. The U.S. smartphone market has reached maturity, and Apple is suffering from slumping demand for its iconic devices. It no longer even reports unit sales figures, a classic move for any company looking to hide bad news. Instead, it touts its services revenue as the most important thing for investors to focus on.
The opportunity to generate recurring revenue from its base of users is certainly immense. The company has an installed base of 1.4 billion active devices, including iPhones, iPads, Macs, and Apple Watches. Already, services like Apple Music have grown to tens of millions of subscribers. The company generated $11.5 billion in services revenue in the second quarter of fiscal 2019, putting the annual run rate around $45 billion.
That's a lot of revenue, but there are some caveats. More than half of Apple's services revenue in fiscal 2018 came from things that aren't really services, in the sense that customers aren't choosing to pay for them. These include licensing payments, most notably from Google for the right to make its search engine the default for the Safari web browser, and the cut Apple gets from apps sold through the App Store. The App Store is the only way to acquire apps on iOS devices, so customers have no choice in the matter.
Apple is also facing antitrust issues. The company's App Store practices, including the fees it charges and how it promotes its own apps, have drawn the attention of regulators, and some developers are suing the company. The services business could take a big hit if Apple is forced to alter its App Store business model.
With iPhone sales generating so much revenue, even a small decline in iPhone demand creates a revenue hole that will be tough for Apple to fill with services. And those services may not be as profitable as the ultra-lucrative iPhone business. Whether Apple can meaningfully grow its bottom line from here is anyone's guess.
More than 85% of the Alphabet's revenue came from advertising in 2018. Still, the company has a presence in a wide variety of areas. It competes directly with Microsoft in the productivity software market, battling the Office juggernaut with G Suite. It competes with both Microsoft and Amazon in the cloud computing market with Google Cloud. Its Android mobile operating system powers essentially all smartphones that aren't sold by Apple. And it even competes with Amazon's e-commerce business with Google Express.
All these businesses operate under the Google umbrella. Outside of Google, Alphabet operates a series of much smaller businesses it refers to collectively as "other bets." These are Alphabet's moonshots -- they have the potential to one day be huge for the company, but they also may never pay off. These moonshots include self-driving car specialist Waymo, life sciences company Verily, and biotech company Calico, to name a few. Also included is X, which Alphabet refers to as "the moonshot factory."
These "other bets" generated just $595 million in revenue in 2018, losing $3.36 billion on an operating basis. Meanwhile, Google itself produced $136.2 billion in revenue and an operating profit of $36.5 billion.
Alphabet's stock price is supported by the immense profitability of the company's core advertising business, as well as the potential for some of these "other bets" to become profitable down the road. Competition in the digital advertising business is heating up, though. Facebook is a strong no. 2 player in the market, and Amazon is working to build up its own advertising segment.
Alphabet is still by far the market leader in digital advertising, and the products that drive advertising revenue, like its search engine, remain extremely popular. But, like Amazon, the company is in the crosshairs of antitrust regulators. Under the unlikely worst-case scenario, Alphabet could see its lucrative business model seriously hobbled.
Facebook's growth has been nothing short of spectacular since it got its start in 2004 (and went public in 2012). Revenue for the social media giant has soared from $12.5 billion in 2014 to $55.9 billion over the past 12 months, while net income has exploded from $2.9 billion to nearly $20 billion. Facebook produced a larger profit in 2018 than it produced revenue in 2015. Nearly all of Facebook's revenue comes from selling advertising. The company also sells various hardware products, like virtual reality headsets, and it generates some revenue from processing payments.
The growth of the core Facebook platform and the acquisitions of Instagram and WhatsApp have driven the company's results. Facebook's various mobile apps have become entrenched in peoples' lives all around the world, and the platforms only become more valuable the more people use them. Facebook enjoys network effects at a global scale, and it will be very difficult for a competitor to dethrone the king of social media.
Even a never-ending deluge of privacy scandals hasn't derailed Facebook, although those scandals could have severe consequences in the long run. For one, Facebook's attempt to launch its Libra cryptocurrency, which it hopes will become a globally accepted currency, may fall flat on its face if potential users balk at trusting Facebook with something as important as money.
More importantly, Facebook is facing the wrath of the government. Not only is Facebook staring down an antitrust probe, but it's being investigated for its privacy lapses as well. The company was just fined $5 billion by the Federal Trade Commission for its sloppy user data practices, and there are still other ongoing privacy-related investigations by various agencies in other countries. Additionally, the Securities and Exchange Commission separately imposed a $100 million fine over misleading disclosures to investors, and the FBI and Justice Department are also probing the social networking specialist.
Much like Alphabet's regulatory predicament, the worst-case scenario here could be pretty bad for Facebook.
Telecommunications giant AT&T traces its roots all the way back to the Bell Telephone Company, founded by Alexander Graham Bell in the late 1800s. Today, AT&T is a major provider of wireless services in the U.S., as well as fixed telephone, internet, and TV services.
AT&T generates the bulk of its revenue -- around 80% in the latest quarter -- from its communications segment, which includes wireless services, business wireline services, and entertainment services like DIRECTV and U-Verse. The rest comes mostly from the WarnerMedia segment, which includes HBO, Turner, and Warner Bros. AT&T also generates some revenue from its Latin America segment and its Xandr advertising business.
In recent years, AT&T has made gigantic bets on media in an effort to transform itself into a media conglomerate. The company paid $67 billion for satellite TV provider DIRECTV in 2015, and followed that up with the $85 billion acquisition of Time Warner in 2018. AT&T now owns a world-class portfolio of content, with the HBO premium TV network acting as the crown jewel. The company is planning to launch a new streaming service in 2019 that leverages this content.
These deals have also saddled AT&T with a monstrous amount of debt, which the company is now working on paying down. At the end of the first quarter of 2019, the company had $175.5 billion of debt, most of which is long-term debt not due in the next year. AT&T is using a combination of its cash flow and asset sales to bring this number down.
This debt is particularly concerning to AT&T investors because it makes the company's generous dividend more vulnerable to a cut. AT&T sports a dividend yield around 6% -- that's a big reason for owning shares of this slow-growing company. The dividend isn't at risk right now, but the more debt there is, the less that can go wrong without putting the dividend in danger.
7. Verizon Communications
Like AT&T, Verizon is a top provider of wireless services in the U.S. Verizon was formed by the merger of two telecommunications companies in 2000, both of which trace their origins to the antitrust break-up of the Bell System in 1984. The current version of AT&T also emerged from that break-up.
Unlike AT&T, Verizon has steered clear of gigantic, transformational media acquisitions.
That's not to say that Verizon isn't active in the media industry. The company paid $4.4 billion for AOL in 2015, and it shelled out another $4.8 billion to buy the operating business of Yahoo! a year later. These assets were combined into Oath, a subsidiary with more than 50 media and technology brands, including HuffPost, Yahoo! Sports, Tumblr, Engadget, and TechCrunch.
Verizon's strategy to become a force in the digital content and advertising markets hasn't worked all that well. The company wrote off $4.6 billion in goodwill associated with Oath assets in late 2018, an admission that it likely overpaid for these assets. Verizon rebranded Oath as Verizon Media in early 2019.
Verizon's core wireless business is still going strong, although growth will likely be slow given that the U.S. smartphone market is mostly saturated. The rollout of 5G networks could provide a boost, but Verizon is certainly not a growth stock. Wireless accounted for close to 70% of Verizon's revenue in 2018, with wireline accounting for 22.5%. Corporate and other, which includes Verizon's media businesses, produced just over 8% of total revenue.
Like AT&T, Verizon stock comes with a high-yield dividend. Verizon's 4.2% yield is quite a bit lower than AT&T's, reflecting the fact that Verizon hasn't increased risk by piling on debt trying to build a massive media empire. Verizon's media bets have been smaller, and they matter much less in the grand scheme of things.
The wireless business comes with daunting barriers to entry, given the high cost of building out a nationwide network. Competition is still a very real threat, but there's little reason to believe Verizon's core wireless business won't continue to pump out plenty of cash for the foreseeable future.
8. Cisco Systems
During the late stages of the dot-com bubble nearly 20 years ago, networking hardware company Cisco was valued at more than $500 billion. It was briefly the most valuable company in the world. The stock's value collapsed once the bubble popped (as so many stocks did), and it then spent many years doing next to nothing for investors.
Cisco stock finally broke out of this lull a few years ago, and it's not a stretch to say that the stock price could surpass its dot-com high in the not-too-distant future. Cisco's $234.3 billion market cap is still well below its all-time high -- share buybacks are the reason for the discrepancy.
Cisco grew steadily following the dot-com bubble, with revenue and earnings expanding at a healthy pace, but it took a long time for the company to catch up with its valuation. In the past few years, Cisco's shift toward selling solutions composed of hardware, software, and services has helped propel the stock higher. Cisco has introduced subscription bundles to its core networking hardware business, and it's diversified into software-heavy areas like collaboration and security.
Cisco's core business is still selling Ethernet switches and routers, and it's maintained a dominant market share for both categories. This business is sensitive to global economic conditions, as uncertainty can lead large customers to delay orders, which can have a significant impact on Cisco's results. Cisco also must contend with competitors that sell cheap hardware coupled with software aimed at undercutting the market leader on price.
These threats haven't derailed Cisco yet, and given the company's recent performance, there's not much reason for investors to be overly concerned.
Chip giant Intel designs and manufactures processors for both the PC and server markets and has been around since 1968. While many semiconductor companies outsource manufacturing to third-party foundries, Intel still manufactures its chips in-house. That's been a huge advantage for Intel, allowing it to maintain a manufacturing advantage over rival Advanced Micro Devices (NASDAQ: AMD) and thus dominate the market. But those third-party foundries have caught up recently, and now Intel is facing serious competition for the first time in at least a decade.
Intel has long been the top dog in the PC CPU market, but its dominance in the server CPU market borders on a monopoly. Even after AMD launched its best server products in years in mid-2017, Intel controlled nearly 97% of the x86 server chip market at the end of 2018. That was down from more than 99% at the end of 2017. AMD is gaining market share, but progress has been very slow.
In the PC market, AMD is having more success. With its third-generation Ryzen CPUs, AMD appears to have fully caught up to Intel in terms of performance, and possibly even surpassed it. Intel may be forced to cut prices in order to compete with AMD's aggressively priced products, which will eat into its bottom line.
Part of Intel's problem is that it fell way behind getting its 10-nanometer production process up and running. Originally scheduled to go into mass production by the end of 2015, Intel now plans to launch its first volume 10-nanometer products by the end of 2019. Meanwhile, AMD's newest chips are using a 7-nanometer process from Taiwan Semiconductor Manufacturing. Intel's constant delays have cost it a key advantage over its rival.
Intel enjoyed lofty profit margins and impressive growth during the period when competition was scarce. With AMD making a legitimate comeback, Intel may need to sacrifice some profitability to prevent it from losing too much market share.
Oracle's core business is database software. The 42-year-old company has a dominant market share, despite increasing competition and the rising popularity of cloud computing. Oracle also sells other software, including enterprise resource planning and human capital management solutions, as well as hardware and cloud infrastructure services. In fiscal 2019, cloud and software licenses accounted for more than 80% of Oracle's revenue. Hardware sales accounted for about 9% of revenue, while services accounted for roughly 8%.
One reason Oracle has remained so successful is the stickiness of its products. Companies use Oracle's database software for mission-critical applications, where any downtime is unacceptable. Ripping out an Oracle database and integrating a competitor's product is time-consuming, costly, and disruptive. For most companies, switching away from Oracle isn't worth the pain, even if there are cost savings involved.
Even Amazon, a company with vast resources, has had trouble moving away from Oracle. The e-commerce giant expects to be mostly transitioned away from Oracle databases by the end of 2019, but the process has taken years. If it takes Amazon this long to switch database software, the average Oracle customer is effectively stuck.
High switching costs don't guarantee that Oracle will remain the market leader forever, but they do buy the company time. Oracle has been attempting to grow its cloud infrastructure-as-a-service (IaaS) business, which provides on-premise database customers a path to the cloud that doesn't go through Amazon. Those efforts haven't made Oracle a major player in the IaaS market, and the company is now teaming up with Microsoft to strengthen its hand in the cloud.
For the most part, Oracle's customer base isn't going anywhere. But the company's growth will depend on its success in the cloud, and its track record so far is mixed at best.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Timothy Green owns shares of AT&T and Cisco Systems. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Apple, Facebook, and Microsoft. The Motley Fool owns shares of Intel and has the following options: short September 2019 $50 calls on Intel, long January 2021 $85 calls on Microsoft, short January 2020 $155 calls on Apple, and long January 2020 $150 calls on Apple. The Motley Fool recommends Verizon Communications. The Motley Fool has a disclosure policy.