Dotcom boom part 2: the ‘picks and shovels’ shares to buy
We all know Apple and Google, but could these lesser-known ‘enablers’ produce better returns? James Connington reports
The idea of investing in technology companies will, for many, bring back painful memories of the tech bubble bursting at the turn of the millennium. Today, there is little of the mania of two decades ago, and tech firms are making profits – which were conspicuously absent the first time around.
Some investors will have exposure to technology through firms such as Amazon, Facebook and Google, which are popular holdings in many funds available to British savers. But there is another approach: investing in companies that make “enabling” technology, the components and software used in many of the most advanced developments.
Telegraph Money asked a number of technology fund managers to name some of their favourite stocks. There are very few quoted technology firms in Britain, so many of the stocks discussed here are listed overseas.
A number of investment shops offer international share dealing, although not all do so within an Isa. You may need to fill in special forms before you trade.
Driverless cars are estimated to be just five years away, depending on technology and regulation. This would dramatically increase the market for the components required. For now, much of the growth comes from “advanced driver assistance systems” such as automatic braking.
Infineon Technologies (German listed)
Market value: £19.5bn; last year’s pre-tax profits: £763m
This semiconductor firm was tipped by all of the technology fund managers we spoke to. It makes components used in systems such as emergency braking and battery management.
Hyunho Sohn, manager of the Fidelity Global Technology fund, said: “Infineon exemplifies a company poised to gain from the move to electric and autonomous cars.
“It has a market-leading position and, as the technology going into each vehicle increases, it should see rises in sales and margins.”
Artificial intelligence and machine learning
The concept of artificial intelligence (AI) – the ability of a computer system to learn and adapt – has existed for decades. Ben Rogoff, manager of two Polar Capital technology funds totalling £2.5bn, explained that, as with any technology, AI started out as a promise with no means of delivery.
“Today, it feels like we have that capability. Right now the applications are straightforward, such as facial recognition and improving search results, but they will expand,” he said.
Nvidia (US listed)
Market value: £75bn; profits: £1.9bn
Nvidia, tipped by several managers, could fall into a number of our categories. Its graphics processing units (GPUS) are becoming increasingly important for “vision systems” in autonomous cars, according to Mr Rogoff.
He said AI offered another avenue for expansion, as GPUS could be used to “train” AI networks. “This is what makes AI intelligent – the ability of the network to improve by looking at its past mistakes. Nvidia is the best way to play this theme,” he said.
Blue Prism (UK listed) Market value: £578m; £5m loss
This firm makes software “robots” that automate tasks to create a socalled “digital workforce”. Chris Ford, manager of Smith & Williamson’s new Artificial Intelligence fund, said it was “one of the very few pure AI firms anywhere”. He added: “It could fall into the ‘undiscovered gems’ camp, despite recent share price gains. We think this technology will become ubiquitous for financial firms to reduce cost and improve accuracy.”
Cognex (US listed) Market value: £6.7bn; profits: £161m
Cognex makes “machine vision” systems used to scan and check products or labels. Tom Riley, manager of Axa’s Global Technology fund, said the technology was gaining ground, with “more manufacturing applications” and increasing use in logistics.
Mr Rogoff said: “We’re pretty sure Apple and Amazon are customers.”