3 Tech Firms Addressing Equality

The wave of racial justice is rippling across the world. Triggered by George Floyd’s killing, the simmering discontent against systemic racism has erupted in a tsunami of protests and the Black Lives Matter movement.

The corporate response has been swift and sweeping. Global businesses have reacted positively to the public outcry and demand for inclusion, equality and workplace diversity. Heads of some large tech corporations in Silicon Valley have publicly acknowledged the reality of systemic racism that denies people of colour (POC) -- including blacks and other racial minorities -- education,  justice, dignity, equal pay, career and leadership opportunities. Going far beyond tokenism and lip service, chiefs of some of the large-cap tech behemoths have promised to take tangible steps to weed out bias baked into their recruitment processes and become a force for that change. Putting money where their mouth is, they have also pledged millions of dollars to initiatives geared towards supporting minorities and tackling racial stereotypes.

Investors sympathetic and sensitive to racial equality may find particularly attractive investment opportunities in the following companies leading the good fight against implicit and explicit discrimination against POC communities. These companies also boast robust business fundamentals, differentiated product offerings, sustainable competitive advantages and a long growth runway adding to their allure.

Tech giant Microsoft (MSFT) operates three overarching segments: productivity and business processes (legacy Microsoft Office and cloud-based Office 365), intelligence cloud (Azure, Windows Server OS), and more personal computing (Windows Client, Xbox, Bing search, Surface laptops, tablets, and desktops).

The Silicon Valley heavyweight recently pledged US$250,000 each (US$1.5 million in total) to six organizations working for advancing social justice, including Black Lives Matter Foundation, Equal Justice Initiative, and Innocence Project. Additionally, Microsoft has donated more than US$15 million through matching employee donations to organizations advancing racial equality. “We have to create an environment where all voices are heard and valued, that’s why inclusion is a core priority for each one of us,” CEO Satya Nadella recently said in a letter to employees.

Despite the COVID-19 disruptions, Microsoft has continued “its string of impressive quarters, with meaningful upside to revenue, operating margin, and EPS,” says a Morningstar equity report. The company managed to offset any weaknesses in revenue derived from the hardest-hit industries (travel, hotel, restaurant), “by an uplift in other areas, notably Microsoft 365, including Teams, gaming, and Azure,” says Morningstar equity analyst, Dan Romanoff, who puts the stock’s fair value at US$196.

“We remain impressed with Microsoft's ability to drive revenue and margins at this scale, and we continue to believe there is more to come on both the revenue and margin fronts,” he adds.

The internet giant Alphabet (GOOGL) is Google’s parent company and derives 99% of revenue from the search engine. It generates additional revenue from sales of apps and content on Google Play and YouTube, and cloud service fees. The company also sells Chromebooks, the Pixel smartphone, and smart home products (Nest and Google Home).

Alphabet recently renewed its commitment to improving diversity at senior levels and pledged US$175 million for black businesses and job seekers. This is in addition to the US$100 million fund that YouTube previously announced to support black artists and creators. The firm recently announced a plan to expand the number of POC in leadership roles by 30% by 2025. “We’ll work closely with our Black community to develop initiatives and product ideas that support long-term solutions,” chief executive Sundar Pichai said in a staff memo.

However, it is worth pointing out that In November 2019, over 80 institutional investors with nearly $10 trillion in assets under management wrote a private letter to the board of Alphabet, requesting a dialogue on issues such as the right to privacy, political participation, freedom of expression, health, and non-discrimination. The request was denied. In response, the group put the issue to vote at the company's AGM. In part because of an unequal voting structure, all the 10+ resolutions put forward by shareholders - including three on human rights - failed to win a majority.

Alphabet dominates the online search market with Google which generates strong revenue. “We expect continuing growth in the firm’s cash flow, as we remain confident that Google will maintain its leadership in the search market,” says senior equity analyst Ali Mogharabi, who forecasts YouTube to contribute more to the firm’s top and bottom lines.

The wide-moat company’s strong ecosystem and user base attracts advertisers and boosts ad revenue, notes Mogharabi, who appraises the stock to be worth US$1,400. “The firm’s first-quarter results demonstrated that revenue diversification is paying off,” he adds.

Apple (AAPL) sells premium consumer electronic devices, including smartphones (iPhone), tablets (iPad), PCs (Mac), smartwatches (Apple Watch), and TV boxes (Apple TV), among others. The iPhone contributes the bulk of the revenue. The company also offers a variety of services such as Apple Music, iCloud, Apple Care, Apple TV+, Apple Arcade, among others. The Americas account for about 40% of Apple’s revenue.

The iPhone maker recently committed US$100 million to education and criminal-justice reform. Chief executive Tim Cook has been vocal in his acknowledgement of racial inequality in America and has publicly vowed to lead the change. Speaking up on racism, Cook says in a memo to employees: “To the Black community — we see you. You matter and your lives matter.”

A dominant force in the global tech market, Apple’s competitive advantage flows from its ability to package hardware, software, services, and third-party applications into intuitive and appealing devices. “This expertise enables the firm to capture a premium on its hardware, unlike most of its peers,” says a Morningstar equity report.

Apple devices offer a unique user experience with their iOS ecosystem, leading to stellar returns. “Apple’s walled garden approach for its popular iOS allows it to charge a premium for relatively commoditized hardware not too different from [peers],” says Morningstar sector strategist Abhinav Davuluri, who recently raised the stock’s fair value from US$220 to US$240.