In meetings with investors, we are often asked why we don’t have any tech companies in our portfolio and by that aren’t we missing out on the next big thing? We find this fascination for tech stocks quite interesting. It is understandable given the immense amount of wealth created by the likes of FANMAG (Facebook, Amazon, Netflix, Microsoft, Apple, Google) and also the excitement of being associated with something that can meaningfully change the way the world works. However, Simon Edelsten of Artemis, a fund management house, warns of the pitfalls. He highlights how tech often comes with a lot of hype initially and it is never easy to see through it. Recent example of WeWork where the hype masked the fact that it was hardly a tech company and yet many an investor burnt their fingers. Furthermore, the need to invest in tech way before a business model to monetise the tech means you are often at risk if competition replicates the tech but also with a means to monetise. Whilst exactly not similar, he shows the competition from Apple and Disney to Netflix who has racked up a mountain of debt procuring content. Finally, even if it does make money, valuing tech with all the uncertainties adds another layer of challenge.
“Tesla is a great example of a company that has made some staggering advances in car technology. This is reflected in its valuation multiples — a price/earnings ratio of 74 times for next year. But it lacks the infrastructure and manufacturing experience of the traditional giants such as Ford (on a p/e of 6.7 and throwing off a 7 per cent dividend) and Toyota (on 11x p/e and yielding 2.9 per cent). Can it beat them into submission, or is it simply showing them the way forward? Most of the world’s major car companies are working like fury on electric car designs, and the market is going to become hugely competitive in the years ahead. Which firms will survive and thrive? Tesla is likely to take a share, but how large, how profitable and how sustainable will it be? And how do you value it? Even if lots of people buy a gizmo it does not mean investors will make any money. When digital cameras came in, investors in Kodak suffered, but shares in winning digital camera makers like Canon and Fuji did not do well either as the new industry was over-competitive.
….If you cannot pick a clear winner, consider other ways to profit with less risk. Very few of the 300,000 prospectors who rushed to California after 1849, proclaiming “there’s gold in them thar hills”, came away with much of it. The most reliably successful entrepreneurs were those selling picks and shovels and food, such as jeans inventor Levi Strauss.
In the modern equivalent of the California gold rush, investors should follow the same approach. There is much hope for tools such as artificial intelligence, facial recognition or autonomous driving. All these applications need fast, efficient semiconductors, and each new design needs to be checked and tested before being sent to the very expensive fabrication plant. The world leaders in computer-aided design and checking are Synopsys and Cadence (the investment trust that I manage invests in both). Firms such as these are not glamorous. They may not become what investors like to call a 10-bagger, but they are probably a more reliable way of generating money from tech than many overhyped alternatives..”
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Note: The above material is neither investment research, nor financial advice. Marcellus does not seek payment for or business from this publication in any shape or form. The information provided is intended for educational purposes only. Marcellus Investment Managers is regulated by the Securities and Exchange Board of India (SEBI) and is also an FME (Non-Retail) with the International Financial Services Centres Authority (IFSCA) as a provider of Portfolio Management Services. Additionally, Marcellus is also registered with US Securities and Exchange Commission (“US SEC”) as an Investment Advisor.
