Big tech – what does the future hold?

While tech giants may be over-owned, their fundamentals are much improved. This means investors should be looking to take advantage of market corrections.

It’s been a tumultuous few weeks for the US tech giants. Poor 2nd quarter results from Netflix and a 20 per cent drop in Facebook’s share-price were followed by impressive Amazon results and a history-making trillion-dollar market cap from Apple. What should we make of these mixed signals? Can we expect growth to continue? Or are fears of a new dot com bubble justified? 

Our view is that the long-term outlook for the so-called tech giants remains positive. It’s worth noting that while the likes of Facebook, Google, Apple, Amazon and Netflix tend to be lumped together as ‘Big Tech’, these are companies which operate in very different markets. Netflix is a media company, while Amazon continues to transform retail. Apple sells phones. Google and Facebook make money from advertising. What unites them is growth – and market dominance.

This dominance, combined with the individual strength of each company, gives me great confidence for the long-term future of each of these names. These are companies whose business models and brands are strong enough to ride out short term wobbles. And although each giant occupies a unique position in the market, most have successfully diversified in recent years. Amazon is not just a retailer anymore. Apple is not all about phones. Google is not just a search engine. These are platform businesses which, individually, are growing very strongly. In a global market dominated by fears of trade wars, investors are right to see these stocks as a safe-haven. 

Take Facebook. The Cambridge Analytica scandal led to fears of regulation and, ultimately, to a drop in the share price. However, Facebook itself, with its politically contentious newsfeed, is just one part of the company’s ever-growing portfolio of interests. We see huge growth potential in Instagram, Whatsapp, AI and Virtual Reality.  By investing heavily in the latter, we are confident Facebook will find new markets to dominate in years to come.

The future also looks bright for Apple, whose historic trillion-dollar market cap made headlines this month. A trillion may just be a number, but it does reflect the tremendous power of the Apple business model. For over a decade the main driver of Apple’s success has been the popularity of the iPhone. But increasingly the market is sensing that there’s more to Apple. With services like Apple Pay and newer products like the Apple Watch, as well as their ordinary hardware offering of Macs and iPads, the company has created an ecosystem which consumers can live inside. That, together with the massive – and increasingly profitable – store base, is why I expect the company to continue to grow at an extremely high level.

Amazon is also well positioned to build on its success. In recent years the company has been excellent at homing in on markets where it knows it can win – markets where it can leverage its trusted brand to grow huge new revenue streams. This is the same for Apple, Amazon and Google. These are unusually powerful brands that the customer has empathy with, and whom consumers are willing to trust as they move into new markets.

The popularity of these stocks has led some to worry about a new tech bubble, but there are fundamental differences between now and twenty years ago. In the late nineties, tech firms tended to be single product companies - e.g. makers of semiconductors, PCs - or they were brand new internet companies that were coming to the market for the first time.  They actually had very little in terms of earnings power, and they were afforded very expensive valuations by investors. None of these companies have what today’s tech companies offer, i.e. strong balance sheets, growing and safe dividends and lots and lots of cashflow which gives investors protection, and gives the companies the option to reinvest in their business.

So although today’s tech giants may be over-owned, their fundamentals are much improved. As investors, this means we should be looking to take advantage of any serious market correction. There’s so much innovation and disruption in the market, and with that comes opportunities, but it also means sentiment can be very aggressive in the sector. But the bottom line is, these so called tech giants are going to grow tremendously well for the next several years. So if you can find an actively managed fund to invest in as a first port of call, to help diversify your risk, then you could be on to a winner.

Alex Neilson is investment manager at Investec Click & Invest.

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