In an age where even fund managers are subject to spoof Twitter accounts, it is obvious the great digital communication age – as promised during the tech boom in the late 1990s – has well and truly arrived. Still, with many still scarred by the losses of the TMT crash, scepticism remains rife and why shouldn’t it when some of these businesses have only recently started making money?
The US economic recovery is seemingly gathering pace, while markets have kept near to all-time highs, still shares in Twitter have fallen by more than 50% from its high of around $75 late last year, while shares in Facebook have also been volatile this year. Could there be a price argument for investing now, or are these American tech companies still the domain of growth investors?
A hefty scale
Tom Slater, deputy manager of Baillie Gifford Scottish Mortgage, is a growth-biased investor that believes that while these internet firms are now of a hefty scale, they still have the potential to grow incredibly quickly with very modest capital requirements.
He says: “We own Google and Facebook, and those are advertising businesses. The contention is that advertising dollars are allocated to an outdated vision of where people spend their time, and as the dollars migrate to where the eyeballs are, the opportunity for these businesses is pretty big. And these businesses are much more dominant in that area than their traditional media counterparts.”
He adds: “Advertising is now about 5% of what you see on Facebook and the evidence would suggest that has not impacted people’s consumption of it, and also there is evidence that these adverts are actually very effective.
“The real questions are how sophisticated can they get in the targeting of these adverts, and how relevant can they make them to the people who are consuming them?”
Slater also owns Chinese messaging service Tencent, which he points out that is – unlike Facebook – a “50% margin” business which has been profitable since it first came into being.
Evolving the user base
“It has evolved with its user base and identified what it was that users wanted from the system,” he adds.
“If you want to, say, personalise the font in the messages then you had to pay, and it has grown into micro blogging and gaming. The most recent development is a mobile messaging app, WeChat, which could be what takes it out of the Chinese market to become a global player. All the time it has been able to find the things that people are prepared to pay for and it has 800 million active monthly users.”
However, Ed Cowart, manager or the Nordea 1 – North American All Cap Fund, warns that owning certain tech stocks that have little underlying earnings support – which, he says, may be capitalising on a concept rather than a real proven business model – is always a risky proposition.
Cowart instead takes faith in what he describes as “old tech” – such as Microsoft, Applied Materials, Anixter and Marvell Technology Group – which he says are more robust.
“We believe much of the information technology sector is in the midst of a change in terms of investor demographics,” he adds.
“Growth investors no longer see the double-digit growth rates common during the heyday of the internet build-out and the rise of personal computing.
“The internet is now as common as a telephone service and the personal computer is just another appliance to be replaced when it no longer works. Rapid growth rates can still be found in niche markets, but the valuations of most of these stocks are too rich for value-oriented investors such as us.”
