Tech stocks can help your portfolio zoom
They could emerge even stronger from lockdown
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The close links with the US tech giants forged by so many of us in past weeks seem set to endure, and may be even strengthen, when our lives are less constrained.
As consumers during lockdown, we have become increasingly reliant on the communication, entertainment, shopping and payment services provided by Apple, Amazon, Google, Facebook, Microsoft, Netflix and PayPal.
More people are taking the relationship with these stay-at-home stocks to the next level by becoming investors. This is driving up their share prices and consolidating their dominance of the indices.
Apple, Google’s owner Alphabet, Amazon, Facebook and Microsoft account for one-fifth of the value of the S&P 500 index.
Apple shares are close to their all-time high, partly driven by the belief that the latest Apple Watch’s monitoring features will appeal to the newly health-conscious. Netflix added nearly 16m subscribers in the first quarter, twice its own target, as people binge-watched shows such as Schitt’s Creek and Tiger King. Its shares are at an all-time high.
Amazon shares have risen by close to 30pc since January, driven by online shopping’s new popularity, even among those with a distaste for the tech titans’ apparently unfettered oligopoly.
Alphabet shares have rebounded after a dip in March. Interest surrounds how X Development, its cutting-edge ideas division, will exploit lockdown data to evolve fresh money-making enterprises.
A fuller picture of the pandemic’s impact, including the costs of ramping up their operations, will emerge when these companies reveal their second quarter results in midsummer. But most analysts already argue that Apple and the rest of the gang have been Covid19 beneficiaries, albeit unwittingly.
Governments may view these extra revenues as an excuse for higher taxes to cover the cost of the economic devastation wrought by the virus. But past experience suggests such attempts may not prove hugely lucrative.
And Marc Cullen, senior equity analyst at Canaccord Genuity Wealth Management says trends that were in place before the pandemic have been accelerated by the crisis ‘which should mean that these companies come out even stronger than before’.
he explains that while Facebook depends on advertising which is correlated to the health of economies, the social network’s $40bn cash pile should soften the blow.
Like the other giants, Facebook will also be able to exploit its scale to cut competitors down to size.
The most highly publicised lockdown success story may have been Zoom, the video conferencing business whose share price doubled, as friends and families socialised from their bedrooms and sitting rooms using the app.
BUT concerns over Zoom’s security may mean mighty Microsoft will triumph with its Teams service, whose daily users have risen in four weeks from 44m to 75m. Moreover, Zoom must also cope with the muscle of Facebook and Google, who are also launching video chat offers.
At their current prices however, the stay-at-home tech stocks are anything but a bargain buy. One reason for this is the cooling of the love affair with ‘value investing’, that is acquiring apparently undervalued shares in the hope that their worth will be recognised. Lately this has not been a rewarding approach. Many investors are more inclined to back proven winners calculating that they will continue to delight.
On this basis anybody buying tech stocks today may feel very smug in five years, especially if these businesses can devise more systems for other industries to save money as the recession bites.
If you would like to take a bet on the ability of the tech companies to deliver such innovation, but do not want to be exposed to an individual share, you could consider Polar Capital Global Technology.
James Carthew of Quoted Data, the analysis business, highlights the breadth of the research behind this investment trust’s stock-picking decisions.
Its holdings include almost every stay at home-tech-stock. Manchester & London, another investment trust, has also progressively moved into tech on the basis that the 21st century’s industrial revolution is happening in this sector.
Scottish Mortgage was the most popular lockdown investment trust pick thanks to stakes in Amazon and Netflix. Its largest holding Tesla, however, is quite the opposite to a stay-at-home stock.