Have the tech gi­ants taken a wrong turn­ing?

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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.

Driver­less rless cars de­pend nd on Google’s map­ping ping data; Face­book, book, led by Mark Zucker­berg, is over­haul­ing er­haul­ing its web­site ite

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