Over three days in late July, America's tech giants put on an impressive show. $Apple Inc(AAPL.US)$, $Microsoft Corp(MSFT.US)$, $Alphabet Inc-CL A(GOOGL.US)$, $Amazon.Com Inc(AMZN.US)$, and $Facebook Inc(FB.US)$ had thrived in the pandemic, and their latest earnings reports hammered home the point. The five companies generated a combined $332 billion in revenue from April to June, up 36% from a year earlier. All of their profits were better than expected. The twist is that all of their stocks, save for Alphabet's, sold off on the news.

The negative reaction reflects the paradox surrounding America's Big Tech complex. Their products are being used more than ever, just as the companies have become increasingly disliked. Regulators and lawmakers -- cheered on by a bipartisan mix of constituents -- are scrutinizing each business and threatening significant actions to curtail their power. Evercore ISI analyst Mark Mahaney estimates that the regulatory scrutiny has already created a 10% drag on large tech stocks.

After thriving during the pandemic, tech companies are facing the challenges posed by a rebounding economy, as businesses and consumers potentially return to old, more analog habits.

Big Tech has hit a perilous moment. It won't last. The five megacaps still have the best business models on the planet, and their stocks look relatively cheap. Investors should own them all, even if the regulatory headwinds take a while to abate. (See sidebar, "The White House Wants to Reign in Big Tech. Here's How.")

Taken together, the five tech giants -- the largest companies in the U.S. stock market by a wide margin -- offer a way to invest in the global economy's most important trends: digital transformation and cloud computing, and the future of communication, entertainment, commerce, and work.

The cloud alone could power the growth of Microsoft (ticker: MSFT), Amazon (AMZN), and Alphabet (GOOGL) from here.

"Cloud is the reason I own all three of them," says Walter Price, who runs the tech investment team at mutual fund company Allianz Global Investors. "The world's enterprises are shifting computing to the cloud. This will be an annuity that lasts for decades. They can sell so many more things to their customers over time."

Price, who has been running money at Allianz for close to five decades, sees a precedent in IBM (IBM), which came to dominate tech spending in the era of mainframe computing.

The old saying was that you don't get fired for buying IBM. Now, the saying applies to Microsoft, Price says. IBM's recipe was selling more software and more services to more customers. Each of the Big Tech companies are following the same playbook.

There are near-term challenges, to be sure. A postpandemic hangover looks the most obvious at Amazon, where e-commerce is growing more slowly than in the past. Apple's (AAPL) quarantine-fueled hardware boom has slowed. And all of Big Tech's hardware arms are feeling the effects of component shortages and skyrocketing shipping costs. Apple has said that iPhone production could be crimped by parts shortages.

Another worry: Big Tech's dominance has some investors seeing a peak in valuations. Apple, which leads the pack with a $2.4 trillion market value; Microsoft ($2.2 trillion); Alphabet ($1.8 trillion); Amazon ($1.6 trillion); and Facebook ($1 trillion) now account for 23.3% of the S&P 500 index's value.

Then again, skeptics have spent years waiting for the law of large numbers to kick in. At the end of 2019, the Big Tech companies were about 18% of the S&P 500. Since then, each of the stocks has gained at least 70%.

Big Tech is eating the stock market, but technology is doing the same to the rest of the world -- and the five megacaps remain the best way to play the trend.

Nonetheless, the regulatory overhang is real, even if there are signs that the risks have been priced in. That was one takeaway from a relief rally of 4% in Facebook (FB) stock in June after an antitrust lawsuit from the Federal Trade Commission was thrown out by a federal judge. (The FTC filed an amended version of the lawsuit on Thursday.)

Tech regulation is gaining steam in Washington, but the courts could hold back the most aggressive efforts. And some investors think that the worst-case scenario -- forced breakups -- could actually unlock value to the benefit of shareholders.

The long-term business trends offset the regulatory risks. Speedy 5G mobile networks are still rolling out, for instance, which will drive strong smartphone sales and more usage of social networks and cloud-based applications.

And then there are the wild cards, which investors haven't even begun to price in. All of Big Tech is poised to benefit if Facebook CEO Mark Zuckerberg's vision of a mixed reality "metaverse" comes to fruition. He sees people working, socializing, and transacting all within an even more expansive internet.

Apple is weighing an entry into the automobile market, while Alphabet could dominate the future of autonomous cars through its Waymo unit. Amazon and Apple are both taking a stab at healthcare and fitness. Facebook hasn't even tried making money off WhatsApp, its global messaging platform with about two billion users.

The investment upside applies across Big Tech, but each company has different opportunities and challenges. Here's a closer look at the Big Tech five:

$Amazon.Com Inc(AMZN.US)$

Amazon best illustrates the current risks -- and untapped potential -- of the group. Its stock has been under pressure since late last month, when Amazon said it was seeing a slowdown in e-commerce growth as more people leave home to shop.

Amazon is also in the crosshairs of regulators and lawmakers. The FTC is reviewing the company's proposed acquisition of the MGM film studio. The primary question is whether to allow the big to get bigger. Should the agency seek to block the deal, it would signal a shift in how regulators approach tech consolidation. But don't expect a rejection to move Amazon's stock in the long term. MGM films would be a nice addition to Amazon's Prime Video offering, but they won't move the needle on the company's bottom line.

In testifying to Congress last year, Amazon's founder and then-CEO Jeff Bezos said, "I believe Amazon should be scrutinized. We should scrutinize all large institutions, whether they're companies, government agencies, or nonprofits. Our responsibility is to make sure we pass such scrutiny with flying colors."

That said, investors could miss the big picture by focusing on Amazon's battles with regulators. The company offers an opportunity to invest in three of the most important elements of the current economy: online commerce, cloud computing, and transportation logistics. Amazon also has a growing advertising business, and big ambitions in healthcare and bricks-and-mortar retail. This past week, The Wall Street Journal reported that Amazon is planning to open department-store-style retail outlets.

Even with a $1.6 trillion current market valuation, Amazon might be a bargain based on its cloud business alone. Growth at Amazon Web Services is accelerating, and revenue from the unit could hit an annualized $100 billion by 2023. Valuing that business at, say, 15 times sales (most cloud application companies fetch higher valuations than that), gives you a market cap of $1.5 trillion, meaning that investors are getting Amazon's e-commerce business and its nascent advertising business almost for free.

Amazon stock has been basically flat for a year. At some point, investors will do the math.

$Apple Inc(AAPL.US)$

The iPhone maker's shares have doubled since the end of 2019, increasing the company's market capitalization by more than $1 trillion. Apple grew sales 36% in its latest quarter, following 54% growth in the March quarter -- the company's two best quarters since 2012.

Apple, meanwhile, is more diverse than ever. While the latest iPhone 12 is a hit, with sales up almost 50% in the latest quarter, everything else is working, too. The company continues to see double-digit growth for its Macs, iPads, and wearables businesses. Apple's services segment grew 33% in the latest quarter. All told, the iPhone is now about 50% of Apple sales, down from 66% in 2015.

There are near-term headwinds, however. A few weeks from now, Apple will unveil its follow-up to the iPhone 12. The upgrades are expected to be modest, and Apple has already warned that it could have trouble meeting demand because of worsening component shortages.

Among the Big Tech group, Apple could face the most immediate regulatory risk, given growing complaints about its hefty 30% commission rate on sales in its App Store. Epic Games sued Apple over the issue -- a decision on the case is pending -- and the situation has received attention in Washington. In July, three dozen state attorneys general sued Alphabet over the fees charged by its Google Play store, and a parallel action against Apple seems inevitable.

In defending the App Store to lawmakers last year, Apple CEO Tim Cook said, "For the vast majority of apps, developers keep 100% of the money they make. The only apps that are subject to a commission are those where the developer acquires a customer on an Apple device and where the features or services would be experienced and consumed on an Apple device."

App tracker Sensor Tower, estimates that Apple generated commissions of $21.7 billion from the App Store in 2020, or about 8% of its annual revenue. Even if Apple is forced to cut its 30% commission in half, the hit would be less than 5% of Apple's total revenue.

Gene Munster, managing partner at the investment firm Loup Ventures, is bullish on the whole set of tech megacaps, but he has a particular preference for Apple, a company he once covered as an analyst at Piper Jaffray. He concedes that Apple is headed for a step down in growth but thinks that Wall Street is too negative. He sees Apple still growing sales 10% in its upcoming 2022 fiscal year, versus a 3.4% forecast from analysts.-

The wild card for Apple investors is the possibility that the company jumps into making cars. Munster puts the chances at less than 50%, but says that if it happens, it would be a "measurable multiple expander" for the stock. Apple currently trades at 26 times earnings estimates for the next 12 months; Tesla (TSLA) fetches an earnings multiple north of 100.

$Microsoft Corp(MSFT.US)$

Microsoft has thrived in the pandemic era, as more companies adopted digital processes to ensure their survival in a world of shuttered offices and limited travel. The surge in PC demand triggered by the work-from-home trend has boosted the Windows business, lifted sales of Microsoft's Surface line of tablets and laptops, and buoyed demand for its Xbox videogame consoles. The company has even seen a pickup in ad revenue, thanks to both the company's Bing search engine and growth on LinkedIn, which, as of the latest quarter, is generating revenue at an annualized rate of more than $10 billion.

But the core driver has been the growth of the company's Azure cloud business -- sales were up 51% in the latest quarter -- and accelerating adoption of cloud-based versions of Microsoft's software, including Office and its communications suite called Teams.

"I shudder to think what the world would have been like if it were not for digital technology and the cloud and collaboration platforms like Teams," said Microsoft CEO Satya Nadella in a recent Barron's interview. "Even five or 10 years ago, I think we would have been in deep trouble."

Microsoft's revenue grew 18% for the June 2021 fiscal year, and the company projects "healthy" double-digit revenue growth for fiscal 2022. But that steady growth does not come cheap. Microsoft has a market value of $2.2 trillion, which makes it the world's largest company after Apple. And it trades for 33 times earnings estimates for the next 12 months, making it the most expensive name in Big Tech relative to growth.

But for risk-averse investors, Microsoft is also the least vulnerable to regulation. Once the primary target of antitrust regulators, the company has been largely left out of the current regulatory debate.

$Alphabet Inc-CL A(GOOGL.US)$

The opportunity in online advertising, the primary domain of Alphabet (and Facebook), might get less attention than the cloud and smartphones, but it is no less compelling. In the recent June quarter, Alphabet's ad sales grew 69%.

YouTube's ad revenue soared 84%, to $7 billion, in the second quarter, putting the business on par with Netflix (NFLX), which reported quarterly revenue of $7.3 billion. Netflix is expected to grow sales by 19%, to $29.7 billion this year, while YouTube's ad revenue is forecast to rise 45%, to $28.7 billion.

Alphabet's growth isn't fully appreciated. Alphabet's Class A shares fetch an inexpensive 26 times forward earnings.

"You're paying a market multiple for the core Google ad-services business, and then you're getting the cloud and all the other bets for free," says Mitch Rubin, chief investment officer at RiverPark Funds.

Some of the other bets could soon come in focus. The company started breaking out results for its cloud computing unit last year. In the recent quarter, it slashed operating losses for the cloud by more than half. While rivals Amazon and Microsoft remain fierce competitors, Alphabet has a mix of artificial intelligence and machine learning that will be key to driving Wall Street's forecasted cloud growth of 51% this year.

The core business -- search advertising -- is doing just fine meanwhile. Google remains the world's largest seller of advertising, and YouTube accounts for just roughly 11% of revenue.

Google represents more than 90% of internet search visits in the U.S., and its clear dominance there makes it an obvious target for regulators.

Alphabet is facing antitrust litigation from the Department of Justice and multiple state attorneys general over alleged monopolistic practices in search advertising -- a threat to the company's oldest-running moneymaker.

Alphabet called the lawsuits misleading, flawed, and dubious, and vowed to defend itself in court.

$Facebook Inc(FB.US)$

Facebook generates the most controversy of the Big Tech firms. In recent weeks, the social networking giant has drawn the ire of the White House over its treatment of Covid-19 vaccine misinformation, and some lawmakers have spoken out about what they perceive to be violations of their free speech. Through it all, though, Facebook has remained a compelling stock, an opportunity that Barron's highlighted in an April cover story.

Even after a 30% gain this year, Facebook shares trade at just 23 times forward earnings, making it the cheapest of the Big Tech stocks and just a bit more pricey than the S&P 500, even though Facebook remains in clear growth mode.

"For an asset that can grow earnings over the next three years at something close to 30%, I think that's highly attractive," says Evercore's Mahaney. "There is a lot of valuation support for where the stock is now."

One area that gets overlooked by investors is Facebook's growing focus on commerce. Facebook now has 1.2 million active shops, where small and medium-size businesses can tap Facebook's enormous social network to sell their wares.

Shopify (SHOP), which provides similar e-commerce tools to businesses, is valued at $183 billion. That is the kind of value that could accrue to Facebook over time.

And seven years after buying WhatsApp, Facebook has turned the service into a global phenomenon. The company is slowly adding payment transfers to the app, making it a potential rival to PayPal Holdings' (PYPL) Venmo.

There could be near-term hiccups, though. Facebook's ever-conservative chief financial officer, David Wehner, has warned investors that revenue growth will slow modestly for the rest of the year, even when compared with the pre-Covid, 2019 numbers.

Privacy changes from Apple have complicated ad targeting on some of Facebook's mobile apps. The company has suggested that its third-quarter results could be affected by the changes.

Then there's the potential regulation. A Facebook spokesman called the FTC's revised lawsuit against the company "meritless," saying that "the FTC's claims are an effort to rewrite antitrust laws and upend settled expectations of merger review, declaring to the business community that no sale is ever final."

So far, the agency's efforts have just highlighted the high bar facing regulators.

In dismissing the FTC's initial lawsuit against Facebook, Judge James Boasberg of the U.S. District Court for the District of Columbia wrote, "It is almost as if the agency expects the court to simply nod to the conventional wisdom that Facebook is a monopolist."

Investors have done well by ignoring such conventional wisdom. Since Barron's first highlighted the regulatory threat for Big Tech in an October 2017 cover story, the five stocks have returned an average of 218%, versus 84% for the S&P 500.

Investors will probably see continued gains from the stocks, even as regulators work overtime to make their case against Big Tech.