Facebook could be the weakest link among the top-tier technology elite but the company, and the sector in general, remain the best source of “super normal equity returns”, T Rowe Price portfolio specialist Nick Beecroft, told a NZ audience last week.
Speaking at a Harbour Asset Management adviser briefing in Wellington, Beecroft said while Facebook faced greater long-term existential threats compared to the likes of Amazon or Alphabet (Google), the social media network was on the “right side of change” for now.
He said like all the big tech firms, Facebook had deep enough pockets to address looming issues such as regulation (a debate intensified in the wake of the ‘live-streaming’ of the Christchurch mosque killings) and competitive pressures.
According to Beecroft, all of the big tech companies invested substantial sums in research and development (R&D) out of the enormous free cash-flow their businesses generated each year.
For example, he said the mega-tech firms generally invested as much in R&D each year as NASA – in the order of US$20 billion. Amazon, currently king of the tech jungle, sunk about $25 billion in R&D last year.
“There are always new entrants and potential threats,” Beecroft said. “But those with the deepest pockets have the advantage.”
But investors should look beyond the big-name firms and narrow sector descriptions to access the returns on offer from the ongoing technology disruption, he said.
“You need to change how you think about tech stocks,” Beecroft said. “Technology is not just the MSCI tech sector but it is impacting every sector including financial, healthcare and energy.”
He said T Rowe Price searches for “tech-enabled” companies that have the capacity to generate higher growth and better margins over time.
For example, the US-based growth manager held about a dozen payments-related fintech companies including the Dutch company, Adyen.
By the T Rowe Price ‘tech plus’ definition, the sector has been “decoupling” from the broader US stock index over the last couple of years as the “super normal profits” spilled over into valuations.
Beecroft said technology firm price-to-earnings ratios had moved higher than the index average but were still a tiny fraction of the heights achieved during the 2000 ‘tech bubble’.
“The tech sector trades at a premium,” he said, “but we argue that it should.”
Historically, technology stocks have produced the highest returns over time, Beecroft said, as the underlying companies create new industries, disrupt complacent incumbents and harvest cash to grow organically.
“If there’s higher growth, these companies make good investments,” he said. “And the tech sector also has the highest volatility, which is good for active managers.”
The tech label was not guarantee of high returns, though, with some companies, such as IBM, likely on the “wrong side of change”.
IBM “missed the cloud” transition, Beecroft said, with the famous firm suffering under static valuations and falling cashflows as a result.
“The turnaround for IBM from here looks very difficult,” he said, citing Microsoft as perhaps the only comparable business that has staged a recovery from the tech trash file.
Regardless of their strong competitive positions, the big tech firms like Facebook et al would inevitably have to cope with increased regulation as governments global seek to rein in their power.
“Platform companies are like the banks 10 years ago; they’re the bad guys,” Beecroft said. “But the internet companies are responding and they’d be very hard to break up.”
Harbour fronts the T Rowe Price Global Equity Growth Fund in NZ – attracting over $50 million from local investors. The top five stocks in the T Rowe Price portfolio comprise: Amazon, Alphabet, Tesla, Alibaba and Facebook.