Big Tech companies are the new conglomerates
December 17th, 2021 | Posted in Investing, technology
How Technology Companies are Becoming the New Mega-Conglomerates
For decades, companies like Johnson & Johnson, General Electric, and Dupont were widely known in the U.S. as expansive, do-it-all conglomerates. The goal was not to make one product or provide one service. The goal was to deploy savvy management and leadership teams across multiple industries, establishing multiple revenue lines and making acquisitions to become market leaders.
Today, those conglomerates have mostly been dismantled, spinning-off flailing businesses in order to focus on core competencies. Just this month, J&J and GE announced they would split their respective businesses apart to drive efficiency and cost savings.1
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Investors may see this trend as the end of the conglomerate, only it’s not – technology companies have stepped in to fill the role, and are now sometimes being referred to as “neo-conglomerates.” The famed FAANGM stocks – Facebook, Apple, Amazon, Netflix, Google, and Microsoft all offer key examples of technology companies embracing the sprawling conglomerate model (to note – these descriptions do not constitute any type of recommendation for these stocks):
Facebook (now known as Meta) – Meta makes money selling ads, which means it wants more users who engage for longer. In the ultimate conglomerate move, Meta is now developing an online world where users can do their shopping, build virtual characters in virtual settings, and essentially live in a digital creation. 
Apple, Inc. – Apple is well-known as a hardware company, selling iPhones and laptops. But its newest ventures have the company pursuing content (Apple TV+), the healthcare market (wearables), and even its latest move into self-driving vehicles.
Amazon – Amazon is best known for its status as the world’s largest marketplace, but in reality, Amazon is also a logistics company, a warehousing company, a massive cloud service provider (Amazon web services), a content streaming service, and is even in the grocery store business with its purchase of Whole Foods. Naturally, Amazon is also spending big on self-driving car technology.
Google – Much like Facebook, Google is largely in the business of data collection and ad sales, via its search platform. But it is also pushing into hardware with phones and Chromebook laptops and pulls in hefty revenues from the global expansion of its Android software. And of course, self-driving cars.
Microsoft – Microsoft and Apple are virtually neck and neck when it comes to market capitalization, though the two businesses are focused on different areas of tech. Microsoft continues to sell business software, videogames, gadgets, and also drives ad sales and data collection via LinkedIn.
What Technology Companies are Doing Differently, and Better
The conglomerates ‘of the past’ often made bets on leveraging economies of scale in manufacturing, to make more products more cheaply as they got bigger. This system worked well in an industrial economy, where manufacturing was a large share of total economic output. But as the U.S. shifted to services- and consumption-based economy, with a more modern emphasis on digital infrastructure, conglomerates like GE making refrigerators and aircraft engines were less profitable by comparison.
One of the key differences with today’s tech conglomerates is the existence of platforms and networks. An Amazon Prime membership gets you free shipping, streaming services, and discounts at Whole Foods; owning a MacBook Pro and an Apple Watch allows a user to sync up devices for maximum efficiency; Microsoft recently created “Teams” as a cloud-based software service where employees can communicate and work, while also using Microsoft’s other software services.
Anytime any of these tech companies bring a new product or service to market – whether through innovation or acquisition – it can be delivered to customers in the network via the existing platform. Going back to the previous example of GE selling aircraft engines and refrigerators, the two businesses had no interconnection – making it an entirely different business with different customers and much different management needs.
This brings up the final advantage modern tech conglomerates have over their previous counterparts – avoiding the “conglomerate discount.” For a company like Johnson & Johnson, if their pharmaceutical division was performing well but their consumer product division was struggling, investors would often value the entire company lower than the sum of its parts. Investors today do not pick apart the “neo-conglomerates” nearly as much. Because of the network and platform effect, investors largely assume all the businesses will ultimately grow close to in-line with the broad company – which may help explain why many tech conglomerates trade at a premium.
Bottom Line for Investors
In our view, the era of secular growth and innovation in the technology sector is here. The types of technologies that could fundamentally alter the way we consume, communicate, and conduct business in the coming decade are truly anyone’s guess. But for investors, the goal isn’t to identify the ‘next big thing’ and invest early. It’s to see the entirety of the sector as a net positive contributor to growth, productivity, and output, and to make it a key part of a diversified equity approach.
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1 Wall Street Journal. November 27, 2021.
2 Zacks Investment Management may amend or rescind the Revolutionize Your Retirement guide offer for any reason and at Zacks Investment Management’s discretion.
3 Zacks Investment Management may amend or rescind the Revolutionize Your Retirement guide offer for any reason and at Zacks Investment Management’s discretion.
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