The Daily Telegraph - Saturday - Money
Have the tech giants taken a wrong turning?
They have driven Wall Street’s growth in recent years but such strong returns may be over. Laura Suter investigates ‘It is almost inevitable that their growth is going to slow’
The technology giants Facebook, Amazon, Apple, Netflix and Google have dominated the American stock market’s growth for the past five years. But can their pre-eminence continue? Facebook’s share price has risen by 364pc since the company floated in 2012, while holding Netflix shares for the past 10 years would have given you a 6,520pc return on your investment. Over the same period Alphabet, Google’s parent company, has returned almost 300pc, Apple 814pc and Amazon 1,800pc.
However, investors are now questioning whether this rate of growth is sustainable. The most recent earnings announcements from the tech giants, collectively known as the “Fangs”, contained some worrying signs.
While the Fangs are still growing, there are concerns about individual companies: Facebook’s ability to grow its user base, for example, or whether the smartphone market has become too mature for Apple’s exponential growth to continue.
Professional investors are selling. Walter Price, manager of the £326m Allianz Technology Trust, is one.
“It is almost inevitable that their growth is going to slow as they have got so big,” he said. “When it comes to the Fangs we are more enthusiastic about Amazon and Netflix and a bit less enthusiastic about Facebook and Google.” Mr Price has recently sold some of his Apple holding on the basis that the smartphone market is now too well developed. Last year Apple was among his top 10 holdings but it no longer features there.
The Allianz manager is not the only one to have concerns about Apple’s future growth. Sales of the most recent iPhone X model missed market expectations when volumes of new iPhone sales fell by 1pc at the end of last year. Some put this down to the hefty $999 (£710) price of the device.
Facebook has come under the spotlight because of reports that users are spending less time on its platform. It has also come under fire for the damaging mental health effects of using the website, leading it to overhaul its newsfeed. Mr Price said he expected this overhaul to take up Facebook’s resources in the coming months, but his main reason for reducing his stake was Europe’s new wide-reaching data protection legislation. The EU’s General Data Protection Regulation (GDPR) will force companies to be more transparent and get more approval for how they track customers.
“I think Facebook and Google do a lot of tracking of people without their explicit permission, and under GDPR they are going to have to ask permission and customers will have the ability to be untracked,” Mr Price said. “That will impose a bit of a slowdown and an additional cost for those companies in the next six months.”
Nick Evans, a technology portfolio manager at Polar Capital, the fund group, is more upbeat about the tech giants’ prospects.
“We expect the pace of growth to gradually slow for all companies as they become larger, but what makes many of the best technology companies sustain such high levels of growth is that great products drive strong customer usage trends and the resulting pricing power drives strong revenue growth,” he said.
However, he is also investing in smaller, higher-growth companies.
“We have many small and mediumsized companies which are growing faster and are much less well known than the Fang stocks,” Mr Evans said. In particular he is looking at machine learning and artificial intelligence.
“If we are correct, the influence of artificial intelligence over the next three to five years is likely to accelerate technology disruption, stimulate growth and act as a continued tailwind,” he said.
Mr Price is investing in “cloud computing” firms – those that exploit the trend towards services delivered online. “It’s hitting its sweet spot in growth and corporate acceptance,” he said. “Companies such as Microsoft have been big in this sector, as has ServiceNow, and Workday is seeing easier and faster growth in this environment.”
One way to benefit from the growth of the tech giants without having direct exposure is to back companies that work with their products. For example, Chris Ford, who manages the Smith & Williamson Artificial Intelligence fund, said he had invested in Roku, a platform through which you can access Netflix. Its software, which is built into some televisions and comes as an add-on with others, recommends recommend content from different platforms, i including Netflix, tailored to t the user.
He is also investing in growing regions suc such as Latin America. MercadoLibre, MercadoLib a website that combines fe features of eBay and Amazon, operates op in the region.
“It is the ecommerce market leader in Latin La America – it is much larger than anyone else,” he said. Mr For Ford pointed out that the ecommerce ecom market was tiny in the region, at around 1pc of o sales, compared with around a 15pc in the West, providing huge potential for growth. MercadoLibre has also been tipped by our Questor column.