By Equity Research in BigTech — Jun 9, 2025

Notes: Day 2 Tech

Day 2 Tech - Apple, Amazon, Google, Meta, Microsoft, NVIDIA

Summary

Tech giants have evolved from disruptive upstarts to entrenched incumbents, yet continue to deliver strong shareholder returns despite signs of aging.
Unlike the Nifty Fifty, today’s tech leaders possess more durable moats due to software-driven platforms, global scale, and continual reinvention.
Cultural resilience - often rooted in founder influence - has been essential in sustaining innovation and warding off bureaucratic decline.
Self-reinforcing flywheel and network effects form the backbone of these firms’ dominance, making displacement by newcomers exceptionally difficult.
AI, cloud, and ecosystem expansion offer ongoing growth vectors, ensuring that even mature tech companies remain central to the digital economy.

In essence, while today’s tech giants have matured into "Day 2" companies, many still operate with the aggressive, growth-at-all-costs “Day 1” mindset that initially made them successful. This means they continue to allocate a large portion of their revenue to growth initiatives. However, as these companies scale, the marginal returns on such investments inevitably decline. Expenses keep rising, but the incremental revenue generated starts to taper off, leading to diminishing returns.

In recent years - starting with Apple - tech giants have begun to recognize this challenge. They are gradually shifting their focus toward optimizing profitability, trimming unnecessary spending, and increasing payout ratios. These are classic "Day 2" behaviors: issuing dividends and conducting share buybacks. A decade ago, such actions would have shocked investors, as they were often interpreted as a lack of confidence in future growth. Today, however, investors are actively encouraging tech giants to return more capital, recognizing that it makes financial sense given their scale. By embracing their "Day 2" status, tech giants can unlock greater shareholder value and create a new, long-tail investment opportunity. This shift marks a significant evolution in how these companies balance growth with sustainable returns, aligning with both investor expectations and organizational maturity.

Disruptors, now Incumbents

What happens when former upstart tech firms scale into global behemoths - and ultimately become the very incumbents they once sought to disrupt? Is it the end of their growth story when these disruptors finally accept their new status as incumbents, or is there still “meat on the bone” for investors?

Rewind to 2010, and it would have been difficult to imagine a world where Google, Amazon, Apple, Meta, and other tech titans are conducting stock buybacks, issuing dividends, seeing their visionary founders retire, and inviting professional managers to take the reins. Few would have predicted the cultural drift, the softening of the original ethos, or even the deterioration in product NPS scores. Yet, over the past decade and a half, we’ve watched these tech giants gradually succumb to the classic pitfalls of legacy incumbents - the very archetype they were once determined to disrupt.

If you could travel back to 2010 and tell investors that these companies would one day become the types of slow-moving, dividend-paying giants they once challenged, few would believe it. What’s even more astonishing is that, despite this evolution, these firms have continued to generate astonishing shareholder returns — so much so that tech has become the dominant force in the US equity market, accounting for more than 100% of aggregate market returns in years like 2024.

Since the late 2010s, a chorus of skeptics has argued that the US market, particularly the tech sector, is dangerously overvalued, with earnings expectations embedded in forward P/E ratios so high that outsized gains seem unsustainable. The proposed alternative? Diversify into Europe, China, or frontier markets. Yet, tech has defied these calls, consistently delivering and surprising even seasoned market observers. As tech valuations climb, so too does the volume of voices insisting the sector is peaking. Interestingly, these bear calls often come from investors outside the core community of tech fundamental analysts, who may not fully grasp the underlying drivers at play.

This makes it all the more important for us to look beyond surface-level metrics like next year’s P/E and knee-jerk mean reversion arguments. What’s actually happening beneath the surface?

We are indeed starting to see early signs of “geriatric” symptoms among tech giants: slower innovation cycles, decelerating growth, and, at times, a loss of their founder-led magic. Here, it’s instructive to look back at the “Nifty Fifty” era of the 1960s and 1970s - a basket of blue-chip US growth stocks like IBM, Kodak, Xerox, and Polaroid. These companies were considered “one-decision” stocks - so dominant and innovative in their time that investors believed you could buy and hold them forever. But as these firms matured, growth inevitably slowed, valuations compressed, and many ultimately failed to adapt to shifting technology and consumer preferences, leading to decades of underperformance.

However, there are crucial differences between today’s tech giants and the Nifty Fifty. For one, the scale and dominance of modern tech platforms are unprecedented. Companies such as Apple, Microsoft, and Alphabet operate in global, winner-takes-most markets, often with powerful network effects, high switching costs, and direct access to billions of users - advantages the Nifty Fifty never enjoyed. Furthermore, the technological ecosystem is now far more dynamic: rapid advances in artificial intelligence, cloud infrastructure, and digital services continually open new growth vectors, even for the largest incumbents.

Another key difference is management agility. While the Nifty Fifty were often slow to react to change, today’s tech leaders have demonstrated an ability to pivot - either through aggressive internal innovation or via M&A. The scale of cash flows and balance sheet strength among the current tech giants also allows them to weather industry disruptions and invest heavily in future growth areas, something their historical counterparts could not match.

Moreover, more than 50 years ago, the idea of being disrupted wasn’t something that kept executives up at night. But ever since the transistor-fueled tech revolution ignited by companies like Fairchild and Intel, the business world has seen wave after wave of industry disruption. Today, that threat is a constant consideration — deeply embedded in the thinking of founders and CXOs alike.

What’s more, these companies benefit from a combination of modest market expectations, robust operating leverage from mature core businesses, and significant capacity to increase payout ratios. The accelerating impact of AI-driven productivity further differentiates today’s incumbents from previous generations.

In short, while tech giants may no longer offer the “day one” investment thesis of their disruptive youth, they remain positioned to deliver solid shareholder returns over the long term. This is true even in the face of recent valuation expansion and heightened short-term expectations that makes the risk-reward less attractive. The growth narrative may be evolving, but the story is far from over.