Long‑term factors driving the tech sector include the expansion of media platforms, the rise of AI and the increasing potential of cloud computing, says Scott Berg.
A little more than a decade ago, the investment universe of the tech sector was composed primarily of personal computers and software companies. However, this has changed in a relatively short space of time.
As large‑scale investors, we must grapple with this dynamic industry and also scrutinise lofty valuations in some areas. This is why our annual trip to Silicon Valley – where we meet with executives from the leading tech firms – is valuable for deepening insights into our investments in the sector.
A chief objective of such trips is to identify the long‑term secular forces at work. These need to be distinguished from the short‑term cyclical swings that may lead to profits or losses in a given quarter.
Among the long‑term factors that we believe will continue to drive the sector are the expansion of media platforms, the rise of artificial intelligence and the increasing potential of cloud computing.
Growth of media platforms
When we met Facebook – including Sheryl Sandberg – much of the discussion revolved around regulation and putting controls in place. We were able to gain more appreciation for the process, in terms of internal operations and how Facebook is interacting with external constituents to get where it needs to be. Clearly, it needs to address these issues, but we felt it understood and was tackling them. Outside this, we felt encouraged. There is a significant amount of work going on behind the scenes with more monetisation of activities.
Listening to the Instagram executive on Insta video, IGTV, monetising Instagram Stories, as well as the associated personalisation, gave us a much better sense of what is possible down the track. A meeting with their head of advertising also suggested that Stories could be a game changer. Top-line growth is not likely to slow and there is a chance of acceleration in a year or so.
Netflix has become the largest video company in history, largely because its reach is unconstrained by infrastructure. This provides a key advantage over other firms that need to lay cables or set up broadcast towers. International expansion has allowed Netflix to spread the cost of high‑quality programming among a global subscriber base.
Rise of the machines
Machine learning and AI are the key themes for the next decade and beyond, with platform companies best placed to benefit.
Analysing customer preferences is an example of how innovation is reshaping the economy. AI relies on computing resources, which are available to many firms through cloud computing services such as Alibaba Cloud, Amazon Web Services (AWS), and Azure.
But providing computers with the information needed to make decisions and perform tasks without human intervention – the branch of AI known as machine learning – also requires vast amounts of data. This is one reason why the biggest tech companies and internet platforms are taking the lead in developing machine learning‑based AI.
Workday is a cloud‑based provider of HR software. Workday’s product is constantly learning and its experience with millions of employee records means that it can now predict which workers are in danger of growing dissatisfied.
In our meeting with Workday, we had a real sense of the strength and durability of its cash flow. It was also apparent how powerful its analytics capabilities had become.
Head in the cloud
In almost every meeting, companies talked about the importance of the cloud. We have seen a transformation in the way that businesses collect and deploy information. Key to recent changes have been constantly updated cloud‑based software systems, which allow companies to integrate information in new ways.
While the impact of this change is perhaps most visible to consumers in the rise of online retailing, it is also touching other industries. We may even be on the cusp of financial companies moving data into the cloud.
Salesforce.com is at the leading edge of this transformation. Salesforce’s customer relationship management system, offered by subscription over the internet, allows companies to not only maintain records on current customers, but also to identify new prospects. Data then flows into revenue forecasts, inventory management and other parts of the enterprise.
Scott Berg is portfolio manager of the T. Rowe Price Global Growth Equity Fund.