Maybe it’s something to do with the herd mentality, but investors can sometimes be a little unimaginative.
Technology, an exciting and forward-thinking sector, is an appealing area. But with so many companies involved in the creation and innovation of the world-class products so many of us covet, why do so many investors simply make obvious investments in companies such as Apple and Samsung?
Smartphone sales are undergoing exponential growth that shows no sign of tailing off. Usage has been embraced in the West by a highly sticky customer base and is spreading into emerging markets.
The battle among the main handset providers to become the market leader attracts a lot of attention, but it is worth looking at companies that provide goods and services across the board. These lesser-known gems benefit from being broadly involved in the rapidly growing smartphone market rather than a single brand.
Qualcomm produces the semiconductors, or chips, that go into your smartphone to make some of the magic happen. The firm’s business is connectivity, so whether your device uses 2G, 3G or 4G, it’s products will be found somewhere in the supply chain.
‘QC has carved itself out as a leading innovator,’ says Jeremy Gleeson, manager of the Axa Framlington Global Tech fund. The company sells to both Apple and Samsung, so it has exposure to their combined market share, at a healthy gross margin of around 63 per cent.
Gleeson says Qualcomm owns intellectual property used in 3G standard handsets and receives a royalty for every device that uses it.
‘Qualcomm has demonstrated through its innovation that it is a key supplier, and it’s easy for companies to choose to use it,’ adds Gleeson.
His fund has owned the share for several years. It bought the share at $36 (£23) in 2008 and it is now worth $63 (£41). The share price was up 10 per cent in 2011 and a further 13 per cent in 2012. The company features in the top 10 holdings of many of the 13 funds in the Investment Management Association’s technology and telecoms sectors.
An alternative to Qualcomm is Broadcom, which provides similar products and services to lower-end models. Its shares price is $36.
Imagination Technologies provides intellectual property solutions focusing on graphics to chip-makers. Gleeson says Imagination suffered setbacks recently. A ‘disappointing announcement about licensing revenues’ hurt the firm and the exit of two companies from the chip market hit sales. That said, it provides technology for iPhones, some Samsung models and Intel, so Gleeson thinks the firm will bounce back. The shares hit a high of 645p in September 2012 but bottomed out in May at 292p. The shares are now priced at 347p.
A glass display is one of the most alluring and sleek design features of a smartphone. Many customers quickly found that this fragile component breaks easily, but the companies that make displays look unlikely to shatter. ‘Display glass is an oligopoly between three companies, two of which are Japanese,’ says Sarah Whitley, manager of the Baillie Gifford Japan fund, which holds two of them: Asahi Glass and Wacom.
The former is priced at 715 Japanese yen (£4.68) a share and Wacom at 1,189 yen (£7.72).
Fuelled by an incessant need to check emails and social networking sites, wireless internet has become a necessity in recent years. Let’s Gowex is a free public wi-fi provider, offering services in Madrid, Paris, London, Buenos Aires, Shanghai and Costa Rica. Gowex’s long-term plan appears to be to create ‘wireless smart cities’, where wireless connectivity will be available on the streets. Held by the Cavendish Technology fund, it is a relatively new player in the market, having been first listed in March 2010 at a price of €3.50 (£2.98) a share. It is now priced at €5.75 (£4.90).
Touch screens are a key feature that changed our mobile phone experience and, unsurprisingly, it’s a competitive arena.
Jeremy Gleeson used to own US touch sensor company Atmel, which did well until the market got highly competitive. He says: ‘I struggled to see any more upside when pricing was only going to get more competitive.’ Atmel now faces at least two viable competitors.
TPK Holdings can be found in the GLG Technology Equity fund portfolio. The shares are priced at 592 Taiwanese dollars (£12.93), up an impressive 83 per cent on last year. The company focuses on sensors for mobile phones but has diversified into satellite navigation systems, electronic books, digital photo frames and portable media players.
An interesting feature of the smartphone industry is that the companies developing phone components are reliant on one other. Unlike the desktop computer sector, where the likes of Intel dominated in every part of the supply chain, the smartphone sector has a structure Gleeson believes is better and more competitive.
Arm Holdings provides the intellectual property that goes into semiconductor chips and processors. This means companies such as Qualcomm are using Arm’s technology and Arm is picking up a tidy royalty. Arm has gained hugely from tablet and smartphone growth. Gleeson says many things have gone right for the company. ‘The world is becoming increasingly more mobile and Arm is at the heart of that,’ he says. Gleeson first bought Arm shares in 2008, at 86p a share, and they are now worth an incredible 988p.
Ian Warmerdam, director of technology investment at Henderson Global Investors, says Arm has a high valuation, but he finds the sector is competitive and lacks the barriers to entry that he likes to see.
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Walter Price, manager of the RCM Technology Trust, thinks it is worth watching more traditional companies for growth that may come as a result of the smartphone revolution.
His trust has holdings in businesses such as Amazon, eBay, Yelp and Google, which he believes will be transformed by smartphones. Lesser-known companies such as internet radio service Pandora and real estate company Trulia also feature in his portfolio, as he looks to hedge away from what he calls the hardware and commodity side of the industry, which encompasses the aforementioned semiconductor chips and intellectual property that he says can be ‘subject to ruinous competition’.
All shares prices quoted correct at 3 June 2013