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Technology Stocks : Investing in Exponential Growth

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From: Paul H. Christiansen11/2/2017 10:08:17 AM
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Digital Transformation is Driving Record Earnings

Last week Microsoft, Amazon, Google, and Microsoft all announced last quarter earnings that beat Wall Street’s expectations and had record earnings. Intel also saw 2% growth even though demand for PC’s was flat. Even Twitter saw their stock rebound even though they lost subscribers.

When I read these earning reports I got an image of Alfred E. Newman of Mad Magazine saying “What, Me Worry?” as these companies just keep plugging along and quarter after quarter show strong demand for their products and services and prove the naysayers wrong on a consistent basis. Sure, their increasing power is coming under all types of scrutiny from governments and consumer watchdogs, but I can’t see any anti-trust violations in any of their cases since the competition between them and others in products and services is a strong as ever. Even though it could be argued that they are too big and could keep out competitors, we have case after case over the years where innovation and creativity can take what might be perceived as an also-ran and move them to the front quickly.

Just look at Yahoo, who owned the search market until Google came in with a more innovative way to search and you get the idea. Same goes for Myspace - they owned social media at a time until Facebook came in with a better and broader solution. If you talk to VC’s who put big bucks into many of these companies and help them grow, they will all tell you that a company that really brings innovation to the area they are invested in could clearly be a threat and they watch for these types of competitive innovations like hawks because they know full well that someone is always nipping at the heels of their investments.

This is not to say that in this political climate that we are going to see more scrutiny and discussion on reeling in some of these big players’ influence and power, but even with that I just don’t see how they are going to do this under the current legal definition of anti-trust or even anti-competitive practices.

While I do think that these big companies who continue to have record earnings need to be aware of these threats from governments and watchdogs, the underlying reason they are growing and setting earnings records is that the big, mid-sized and even small businesses are in the initial stages of what is called the Digital Transformation.

This is especially true for Fortune 1000 companies who still have many legacy systems in place that are still analog and realize that every part of their business must move to digital to stay competitive and prosper. But even SMB’s are moving at a faster rate to bring their businesses into best digital practices.

If you review all three of these charts in light of your own company or business, you can get a sense of where you are today and perhaps get some clarity on where it needs to be in the future. But the big takeaway is that everything is moving digital and moving to the cloud. What is important to these businesses like Amazon, Google and Microsoft are that for most of the companies in the process of a major digital transition - they all want to off load the cloud part of the needs instead of building it and hosting it on their site.

Only the biggest companies, and especially ones with major government contracts where the data centers must be inside a company to meet government security mandates, can manage a walled data center inside their firms. For the majority, that is now being outsourced to the major players mentioned above who are buying more and more data center equipment and charging significant monthly fees for their service. This guarantee’s a steady stream of income, and since in most of their customer cases they are in the initial stages of this digital transformation, you can see why their earnings are strong now and look strong well into the future.

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