GVA Research on CNBC’s Nightly Business Report: 4 Horsemen of the Nasdaq

Fifteen years ago the 4 stocks that dominated the Nasdaq were Oracle, Microsoft, Intel, and Dell. Today it’s Facebook, Google, Amazon, and Apple – these four stocks hold dominant positions in the tech sector and have been among the biggest engines driving the Nasdaq, do you see it staying this way for the foreseeable future? Will the tech leaders of today be tech leaders tomorrow?

While the principles of successful technology sector investing are constant, the companies to whose shares they apply change.

In 2000 the major technology paradigm was the desktop PC computing model in which standardized software and components powered a range of different manufacturers machines, something referred to as the “WinTel” (for “Windows and Intel”) model of which the representative companies were well-known (i.e. DELL, INTC, MSFT) as being among the market capitalization leaders in the Nasdaq index. Away from “WinTel”, the rise of enterprise computing and its dependence on relational database software served to vault ORCL to prominence. As we know well, the major technology paradigm is now built around “Mobile, Social & Cloud” as the computing model for consumers and businesses has shifted to the distributed, “thin client” model that was envisioned earlier but which has been enabled by subsequent increases in available bandwidth, communications capacity and computing cost declines.

For now, the “Mobile, Social & Cloud” paradigm has not become saturated with users experiencing declining marginal benefits, although there is debate as to whether the high-end smartphone market is reaching maturity (a negative for AAPL) or whether the rise of mobile search at the expense of more profitable desktop search constitutes an insurmountable barrier for search provider profitability (a negative for GOOGL). These concerns aside, the new technology sector leaders (i.e. AAPL, AMZN, FB, GOOGL) appear to be positioned to enjoy relatively high growth over the next 3-5 years.

Of the stocks mentioned, if you could own just one of these stocks which one would it be and why?

Our top pick among the technology sector leaders is AAPL. Concerns that AAPL would experience slower growth as it reached the one-year anniversary of the larger form factor iPhone6 were more than offset with the September 2015 quarter results showing China demand driving more than +100% year/year revenue growth along with steady positive growth in developed country markets. Apart from offering investors growth at a reasonable price, AAPL returns capital to shareholders through both dividend payments and share repurchases, something none of the other technology sector market capitalization leaders do. In terms of corporate governance, we view AAPL as being more shareholder friendly than AMZN, FB or GOOGL where ownership is either concentrated or insiders control super-voting classes of common stock thus leaving minority shareholders in a disadvantaged position.

Followed by your second, third and fourth choices and why you would own them?

#2: FB – look for 3Q15 results to be strong as mobile strategy led by WhatsApp acquisition provides superior growth globally. If investors want exposure to mobile & social, FB is the large-cap stock to own. The negative is that the shares have already had a good run and that at $300bn market cap, how much more can FB valuation increase?

#3: AMZN – leading in cloud computing through Amazon Web Services (AWS), AMZN seasonally benefits from holiday shopping period.

#4: GOOGL – investor interest primarily driven by signs of greater cost control due to CFO Ruth Porat, but need to see revenue growth accelerate.

What would make compel you to buy FB, AMZN and Google since you don’t own them?

Would need to have meaningful price correction primarily stemming from broader market pull-back as stock specific price correction might indicate business model issues.