How to play the next phase of the tech boom

Whereas consumers fuelled the previous tech boom, powering the next bout of wealth creation will be companies increasingly adopting new technologies such as cloud computing.

The bull market over the past decade has been dominated by consumer tech stocks. Facebook captured the surge in use in social media that followed the mass adoption of smart phones, while Amazon pioneered e-commerce and changed the way we shop. Meanwhile, Netflix revolutionised online content streaming. Consumers were key for the tech boom.

How long these companies can maintain their dominant positions is subject to much speculation. Leading shares in the tech sector are often seen as overvalued. One future headwind is concerns over privacy and the monopoly power of certain companies, which has led to calls for more government intervention. But, even without regulatory pressure mounting, the chances are the strong share price returns enjoyed over the past decade are unlikely to be repeated.

Bruce Stout, manager of Murray International IT, agrees, pointing out the “big unknown” is whether these big tech names are out and out growth stocks or cyclical businesses. “Google, for example, has become the distributor of choice for advertisers, but advertising has always been very cyclical in nature and during a downturn companies cut back. At this moment in time no-one knows how a tech business like Google would fare under this scenario. The same with Netflix – if consumers need to cut back discretionary spend – will they cancel? If these tech businesses are cyclical then investors have got to be very careful in regards to their valuations.”

Instead, according to veteran tech investor and manager of Allianz Technology trust Walter Price, the next exciting stage of tech-led wealth creation will be the sale of technology to businesses. Whereas consumers fuelled the previous tech boom, powering the next bout of wealth creation will be companies increasingly adopting new technologies such as cloud computing.

The increased adoption of cloud computing is being driven by simple economics: it has the ability to massively reduce the costs for a company. According to stats from the IDC, the total cost of ownership for businesses making use of cloud services is 64.3% lower for companies. That includes 63.4% lower costs for data centre hosting and infrastructure costs and 63.5% lower staffing costs.

The numbers will be hard to argue with for many companies, and as a result we are currently undergoing an “enterprise shift”, says Price.

In 2016, cloud computing accounted for 6% of global IT spending by businesses. By 2018 that had grown to 10%. By 2022, it is predicted that that will grow to 25%, bringing cloud computing revenues to $325 billion. We are likely at “an inflection point” in cloud computing adoption among businesses, Price says. He adds: “We're just getting started.”

Price cites a number of firms within his portfolio that are well positioned to benefit from this growth. Twilio, for instance, is a cloud based communications service. The company allows businesses to integrate their communications into one place in order to better communicate with customers. It accounts for 3.1% of Allianz Technology trust’s portfolio.  

Price also cites Salesforce, which makes use of cloud computing to help businesses improve sales. The trust was an early investor in the company and has since seen its share price rise by around 40%. The company now accounts for 3% of the trust. 

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