Tech is a no brainer for investors. But a simple investment theme for the sector is being badly executed.
Investors are too narrow in their focus, chasing Nasdaq and FANG (Facebook, Amazon, Netflix and Google) stocks similar to how investors often play emerging markets in a simple fashion.
Investor sentiment is cautious, except when it comes to tech stocks — even a scandal doesn’t hurt for long. The scale of the Facebook data privacy issue is still being uncovered with new revelations about information shared with Huawei, a Chinese company that some American politicians and regulators want banned from government contracts because of national security concerns. Facebook stock continues to trade around records.
Apple recently got handsomely rewarded for making sense of tech disruption, its market value soaring close to a trillion dollars as it embedded all of the themes — big data, artificial intelligence (AI), augmented reality (AR), internet of things (IOT) and enhanced security — under the hood of its iPhone.
The problem is that the market now considers tech stocks a defensive play. How did a growth sector, trading around eye-watering valuations thanks to crowding, suddenly become defensive? Has everyone forgotten it also sold-off in the February meltdown and again in March?
After attending three of Europe’s biggest tech conferences — Web Summit, Mobile World Congress and Viva Technology — in six months, I will admit the themes are challenging and there is a lot of noise thanks to start-ups pitching.
At Web Summit in November, it seemed big companies were bamboozled by blockchain, AI, AR, virtual reality (VR), big data, the internet of things and fintech (financial technology) … with the real possibility that the Amazon effect would decimate companies.
Fast forward six months and the C-suite is tackling digital transformation. Companies are exploring tech themes all at once and chief financial officers are allocating money to once radical ideas. Some chief financial officers are even willing to write-off entire investments that fail, just like a start-up, putting it down to a learning exercise.
The benefit of countries trying to replicate Silicon Valley in major cities is that companies have a plethora of ideas on their doorstep. Entrepreneurs are having their ideas commercialized and big companies are bringing innovation to customers faster through these partnerships with start-ups, rather than expensive acquisitions or relying on in-house tech teams innovating from scratch. Digital transformation looks like it’s on speed, reducing the likelihood of the dreaded Amazon effect.
Investors believe tech can tackle costs, but fail to value the revenue potential. One French company told me at Viva Technology last month that innovation has expanded margins. New revenue lines are emerging as even basic items like a hairbrush, shower head and tape measure are reinvented. Market participants are lazy, overlooking the potential for tech to drive earnings at traditional companies, investing only if the company has an obvious tech label.
So what to look for in the future? Good management will count more than ever, as leaders need to be visionaries to chase tech-driven revenue. It’s a different era to maximizing balance sheet potential and utilizing cheap money to do deals.