The first half of 2017 saw technology stocks flying on Wall Street. Whilst the passion for all things tech has cooled a bit of late, the world has certainly become a digital and technological marketplace. So as an investor, looking for the next big thing, how can you pick the new Facebook or Google?
There is no doubt that the world is changing at an ever increasing pace and so are the leading corporations. A new industrial revolution is happening which turns many of the previous ‘givens’ on their head. For example, the biggest retailers in the world own no shops – Amazon, Alibaba. The biggest media companies in the world also produce no news of their own – Google, Facebook. Then we have a fast-growing company in the hotel world that owns no rooms – Airbnb – and a major transport provider that owns no cars – Uber.
It is clear that digital and tech companies will be at the forefront of the future world economy and the FAANGs have certainly got their teeth into the marketplace. These leading companies (Facebook, Apple, Amazon, Netflix and Google) have appeared relatively recently and have rocketed into the leading charts of the world’s biggest companies. The Dow Jones may have been around since 1896 but Google (Alphabet) isn’t yet 20 years old. However, it has grown rapidly to become the second biggest company in the world in terms of market capitalisation. Netflix was established just 20 years ago, Amazon 23 years, and Facebook a mere 13 years. The biggest company in the world in terms of market capitalisation is the second ‘A’ in FAANG, Apple, (in FAANG terms it’s relatively long in the tooth, having started in 1976). All have produced excellent growth for their investors, rising on average three times as much as the rest of the market.
New technologies are creating paradigm shifts in the way markets and consumers operate. We have robotics and AI, electric and driverless cars, plus Virtual Reality, Big Data, blockchain and Fintech to name but a few. So who will be the future star performers emerging in these sectors?
Smaller companies have always provided some of the more exciting investment opportunities, being able to move swiftly to exploit niche growth markets, particularly in this age of the internet and technology. It is also easier for them to increase profits rapidly – doubling a £20m profit is easier than doubling £200m – and this can reflect in significant share price increases.
However, whilst there will be some stars of the future in their midst, statistics show that a lot of smaller companies inevitably fail, for all sorts of reasons. Investors learned the hard way about this with the Dot-com bubble and crash back in 2001-2. With the FAANGs currently flying high, some Permabears even see a second bubble appearing now.
So as an investor, if you are looking for future winners, the best way to approach the burgeoning tech sector is with eyes wide open. It is worth bearing in mind that not all new technologies last long enough to become old, let alone profitable. It is also probably best to treat the tech sector as a satellite investment, taking up a small percentage of your overall portfolio.
Further, it may make sense to look to invest in funds – ie global technology funds or discovery funds – rather than doing your own stock picking. There are many tech companies around with really exciting ideas but minimal business income. Specialist tech fund managers have the resources to research and invest in companies which have innovations that are ready to be deployed.
So if you are looking to pep up your portfolio but need some advice, contact Kellands.