There are two major schools of technology investing. The first believes that all investments these days are fundamentally technology investments. Every big company relies to a greater or lesser degree on the innovations and efficiencies of technology to replace the high costs and laggardly habits of human beings. The faster they do this, the higher their returns.
The second school covets the pop and fizz of the new. It rejects the tedium of earnings-based valuations in favour of the helium of potential. It piles into the latest new share offerings and regards Twitter as the future of mobile advertising, not a punchline.
One school feels like traditional, copper-bottomed investing, the other like a long night in Las Vegas. Each attracts investors with very different risk profiles. As you consider where to park the last of your cash for this tax year, it’s worth trying to parse the ever broadening category termed ‘-technology’.
If tech investing only screams to you of 25-year-olds in hoodies with no concept of a business model, then you will miss out on significant shifts in mainstream companies. But if all you care about is the latest company off the venture capital conveyor belt, you could be missing out on lower-risk, higher-reward tech investments elsewhere.
Look at the arms race between Britain’s supermarket chains. The key weapons these days are customer loyalty schemes, online shopping tools and logistics. The shrinking wallet of the British consumer and fights to endorse this or that celebrity chef are mere background noise to an underlying technology war. One of the most successful investment strategies last year was to buy Ocado, which more than quadrupled as investors grasped the value of its underlying technology, and to sell Tesco and Wm Morrison, which fell. Would you call this a technology or a retail investment? Either way, it was a terrifically profitable one.
The problem many still have with tech investing is the memory of the dotcom bubble. The Nasdaq, home to many of America’s major technology companies, has never come close to regaining its peak of 5048, reached on 10 March 2000. But that was four years before Google went public or Facebook was founded. It was less than three years after Steve Jobs had begun his rebuilding job at Apple. To lay the curse of that bubble on the tech companies of today is deeply unfair. Google has proved itself beyond all measure. If you only had to buy one technology stock, and wanted to sleep well at night, Google would be it. It had revenues of close to $60 billion last year and net income of just under $13 billion. It has scads of cash, all the talent it can buy, a natural monopoly in online advertising and a more than decent position in mobile.
Google is also making multiple bets on the next wave of technological innovation. David Cameron’s promise earlier this month of an extra £45 million investment in ‘the internet of things’ is scarcely a ripple in Google terms. In January, the company spent £2 billion on Nest, a company which makes smart thermostats and smoke detectors. Invest in Google and you don’t just get the golden goose of revenue from its AdWords search advertising, you also get a portfolio of bets on the future. Why try to figure it all out for yourself, when Google will do it for you?
A similar logic applies to Apple. The company has spent around £9 billion on share buybacks in the past few weeks, which should give you some idea of what it thinks of its current valuation. Tech nerds fuss over Apple’s ‘innovation pipeline’ — how many exciting new products it has in development, and whether its next big one will be a watch or a TV. If you feel pernickety, you might worry about Apple’s disappointing performance so far in China. But Apple remains one of the most popular investments for hedge funds, who see a fairly low price-to-earnings ratio plus $150 billion or so in cash — that means a company not only running sleekly and profitably today, but capable of bludgeoning its way to more success in the future.
There seems little risk in buying big names in technology, such as Oracle, Intel, Qualcomm, Microsoft and the UK’s Arm. None are overpriced and all should benefit from recovering business and consumer spending. If you fancy more of a punt, Hewlett Packard has already come a long way from its nadir in 2012. Its stock price nearly doubled last year, and should rise further as the results of the company’s hard-fought turnaround start to show.
Moving towards the middle of the tech investing field, the noise and static start to rise. Quickly, you run into Amazon. Its stock price has been humming upwards for the past year, up by more than 50 per cent. It is now 20 years old and has yet to make dramatic profits. But each year it guzzles up more market share and posts more revenue. Its valuation makes little sense based on its recent earnings. But it makes perfect sense if you accept that Amazon is the Mongol Horde of online shopping, Jeff Bezos the Great Khan, and that one day, when he is good and ready, he will flick a switch and start producing free cash.
And then there are the young ’uns. Since its turbulent share offering two years ago, Facebook stock has risen by 79 per cent. Twitter has doubled in the four months since its shares went on public sale. Advertisers are increasingly confident that both can deliver paying audiences. With this in mind, it may be worth keeping some powder dry for what will probably be two of the biggest share offerings in the US this year: Sina Weibo, the Chinese Twitter; and Alibaba, the Chinese e-commerce giant.
There is plenty of froth deeper down in the investment world. Venture capital and angel investing in San Francisco, New York and London is on a tear, and it is much harder to discern the good investments from the bad. But at the level of the public markets, good technology companies seem a very deserving long-term bet.