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magazineLook beyond FAANGs and Unicorns to tech’s enduring strengths
The technology sector feels a bit tarnished right now as many of its constituents prepare to report their third quarter earnings.
The famous FAANGs – Facebook, Amazon, Apple, Netflix and Google (whose parent company is Alphabet) are struggling. Some, namely Amazon, Facebook and Google, are under heavy regulatory scrutiny while others (Apple, Netflix) are struggling to maintain previously stellar growth rates.
Meanwhile a lot of the ‘Unicorns’ – that is start-up companies that have reached a valuation of $1bn or more - are seeing their valuations come under severe pressure, or in the case of WeWork failing to reach the stock market at all.
Yet the tech-heavy US Nasdaq index continues to trade at record highs – a reminder that there is more to the sector than just the FAANGs and Unicorns and there are still reasons to be positive on the wider technology sector.
In truth investors should not be surprised by the problems facing the FAANGs which had been on a gravity-defying growth path for some time and have, in a lot of cases, been generating out-sized returns along the way.
PRESSURE ON RETURNS
Typically when margins are high competition moves in to take a slice of a lucrative market or regulators intervene to ensure consumers aren’t being ripped off. The latter point is even more important in the tech sector given concerns over privacy and how our data is used.
Meanwhile the Unicorns, names like Uber, Lyft, Slack and Pinterest, have merely been colliding with reality as the capital markets do what they should.
Profit remains a long way off and, in a less certain environment, investors are quite rightly more reluctant to pay up for the promise of jam tomorrow.
Ahead of the current US earnings season former BlackRock technology fund manager William De Gale, who now steers BlueBox Global Technology Fund, highlighted several reasons to be cheerful about tech including:
– Continuing demand from the US consumer;
– The roll-out of information technology across almost every other sector;
– The fact that Unicorns and FAANGs only represent a part of the technology industry.
Just look at a stock like Microsoft, up more than a third in 2019 as it enjoys strong growth with its cloud-based and subscription-based business model. You can read a detailed article on the company here.
It may not be as flashy as a firm like Tesla, Uber or Spotify but it has an extremely robust balance sheet and generates lots of cash-flow.
And given the continuing growth potential in technology, retaining some exposure to the space seems sensible as part of a balanced portfolio.
Popular funds include in this area include Neptune Global Technology Fund (BYXZ5N7) and Polar Capital Global Technology Fund (B42W4J8).
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