Tech stocks defy the odds
ALL OF us invested in global index funds need to keep a close eye on America’s leading-edge tech sector.
The key S&P 500 has climbed 20pc in 2019 in spite of the US-China trade dispute, trouble in the Arabian Gulf and Brexit.
This is partly because Wall Street is less driven by vulnerable, financial, industrial and energy stocks and more by Silicon Valley and the FAANG shares – Facebook, Apple, Amazon and Google. The old dowager of the sector, Microsoft, is up 35pc this year, Apple 29pc and Facebook has gained 55pc.
This is just as well, since some of the new arrivals in the tech sector, notably taxi apps Uber and Lyft, have disappointed since their initial public offerings. But that is not stopping others seeking a quotation. If anything, they are rushing to market, fearing that geopolitical factors could be a signal of an oncoming recession and bear market.
The most recent tech sector to come into focus is property. We Work is the global home of start-ups. Since it modestly opened shop in New York in 2010, with shared office space in fashionable Soho, it has established 64 spaces in the city and has 834 locations open or soon to open worldwide.
In London it controls the old redbrick Prudential headquarters on the edge of the City. Japan’s top tech investor Softbank, owner of Britain smart-chip pioneer Arm Holdings, is We Work’s cornerstone backer. It has piled £9bn into the enterprise and had been hoping for a huge payday. Backers proposed an IPO valuation of a whopping £40bn, but when investors read the prospectus they took fright.
The governance of founder and chief executive Adam Neumann is questionable. He sold a lot of his shares in advance, was personally renting buildings he owned to We Work and couldn’t come up with convincing profit projections.
INSPITE of fancy language about using artificial intelligence and big data to transform the rental market, the tech component was thin. Valuation plummeted to £12.5bn and We Work’s IPO has been delayed, delivering a black eye for Softbank chief Masayoshi Son.
We Work, Uber, Lyft and another recent offering, networking group Slack, have injected some reality into a tech sector which could do no wrong.
Remarkably, the shares of Microsoft and the FAANGs are defying the attention of regulators. The top American anti-trust authorities are taking a leaf out of the book of the european Commission and homing in on Silicon Valley.
The US Justice Department is focusing on Google and Apple and the Federal Trade Commission (FTC) on Facebook and Amazon. The FTC has been joined in its work by attorney generals from across the 50 states. So it is getting real.
President Trump, as a capitalist himself, is not by instinct a populist trust-buster in the tradition of Theodore Roosevelt who took on the might of Standard Oil in the early 20th century, or Ronald Reagan who broke up AT&T in the early 1980s.
Big battalion investors must figure that if, for instance, Facebook was broken up into Mark Zuckerberg’s original social media site, Whatsapp and Instagram, the pieces might be worth more than the whole.
That certainly proved to be true of Standard Oil and AT&T. The trust-busters pose a bigger threat to founder and billionaire power than to the S&P 500 indexes or the tech funds. Thank goodness.