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Investing In The Technology Sector

Investing In The Technology Sector

Article by
Simon Reichenbach
STAPLES RODWAY ASSET MANAGEMENT
simon.reichenbach@sraminvest.co.nz

An aspect of modern life is that we are confronted daily with the opportunities and challenges of fast developing technology. This presents exciting opportunities for investors to ride the tech wave, but with this rapid growth also comes the danger of rapid obsolecence in both traditional and technology stocks. Could today’s Facebook become tomorrow’s Yahoo?

The smartphone has become pervasive, and for many, indispensable. Apple’s iPhone is the standard bearer for the adoption and seeming ubiquitous application of smartphone technology. In doing so Apple has become the largest United States corporation by capitalisation, displacing the behemoths of the turn of the century such as Exxonmobil.

Using your smartphone, you can connect with friends all over the world through Facebook. This social media titan has over 2 billion active users worldwide as at June 2017. Not only does Facebook provide social interface, but in doing so it has become the world’s largest publisher, although Facebook generates no content itself. In doing so it has significantly displaced traditional print media. Facebook also owns telecommunications disruptor WhatsApp and photo sharing application Instagram. Facebook continues to explore new opportunities in artificial intelligence and virtual reality.

The smartphone user also has access to Google, enabling instant availability to a plethora of information sources that are growing exponentially. Google is the major asset of the company Alphabet which is incubating further disruptive technologies. Alphabet was responsible for the development of the Android operating system that is a fierce competitor to Apple’s iOS operating system. Google’s assets also extend to YouTube and in so doing it has helped facilitate on-demand viewing of self-curated content, challenging the relevance of traditional broadcast media companies.

The smartphone user is equally as likely to dip into Amazon.com for their retail fix. Amazon has expanded from an online book store to a portal that facilitates ecommerce and is supported by a massive logistics business that is usurping traditional storage and distribution companies. Through its evolution Amazon has also developed a data centre business, Amazon Web Services, which is one of the largest providers of cloud storage globally. Amazon is expanding its retailing operations internationally and will, next year, enter the Australian market directly. This represents a significant threat to brick and mortar retailers and Australian listed retailers have been de-rated in part due to the challenges that lie ahead in the retail sector. Amazon is continuing to explore new opportunities and has its own entertainment content and tools to enable the Internet of Things to be realized.

The technology sector has grown massively over the last decade, so much so that the top five technology companies, by market capitalisation, (see right) exceed the value of the bottom 250 companies of the S&P500. In the last year these companies have grown much faster than the S&P500 index. The technology sector is important for investment portfolios from several perspectives:

Performance: The sector is high growth. Failure to include some technology exposure excludes the portfolio from participating in one of the most likely value accretive segments of the investment universe. Not all technology stocks are winners. An ability to keep reinventing and remain competitive is critical. Google usurped search company Yahoo. Being amongst the companies that fail to broadly appeal can result in irrelevance and value destruction.

Disruption: Traditional investments previously considered blue chip may have their business propositions permanently impaired or even rendered obsolete by new entrants. Media companies have had their advertising revenues ravaged by online media.

Although the technology sector is ripe with opportunity it is also highly volatile. The late 1990s was a period of  irrational exuberance’ in terms of enthusiasm for the technology sector that culminated in the dotcom crash. Consequently, participation in the sector should be tailored consistent with an investors’ tolerance for risk and return, with an appropriate degree of exposure. Investors wanting ownership of technology companies should consider doing so with a fully diversified investment strategy over the longer term.

Staples Rodway Asset Management is a boutique investment advisory service that specialises in providing personalised and impartial investment solutions for individuals and trusts. An adviser can be contacted at enquiries@sraminvest.co.nz or on 0508 220 022.

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