Should advisers be worried about investment in this dynamic sector? Brian Tora reflects on lessons from history and analyses what the future might hold for tech stocks
Do you recall the crazy days of the end of the last century? It was, of course, the run up to a new millennium, with all the excitement that upcoming event generated. Nowhere was this enthusiasm more evident than in the stock market and, in particular, in those shares that fell into the so-called TMT environment. Technology, Media and Telecoms was what it was all about as we rushed towards the year 2000. And Technology was the brightest star in a firmament that seemed to guarantee investors ever increasing riches.
It all fell apart as we ventured into the noughties, of course. Our own UK stock market actually peaked on the last trading day of 1999, establishing a high that was only surpassed last year. Wall Street, buoyed by a positive plethora of technology businesses, carried on for a few months, but in March 2000 the party final ended. Technology companies, promising fat returns, suddenly found their backing evaporated and, lacking profits – and cash flow in many cases, simply folded or fell into the arms of financially more secure partners.
Professional investors learned good lessons from those chaotic days. Those, like me, who were around to observe the carnage that developed as the technology bubble deflated, were conscious that promise does not always translate into delivery and that traditional valuation techniques had merit. Back then, an accounting term – EBITDA (earnings before interest, tax, depreciation and amortisation) was popular amongst start-ups wishing to demonstrate they had potential, if no profits. The joke amongst analysts at the time was that EBITDA really stood for “Earnings before I tricked the damn auditor”. In the end it was profits – and cash generation – that counted.
Just recently we have seen some wild swings in the fortunes of the shares of technology companies. It has been suggested by several commentators in various media that we are about to witness dot. com bust 2. Make no mistake, though, the situation is very different to that of nearly two decades ago. For a start, this is not an across the board collapse – if collapse is an appropriate term in this context. That this market is looking increasingly tricky is undoubted, but it is far from looking like a busted flush.
FAANGs in the spotlight
Shares like Apple, Google (parent company Alphabet) and Amazon continue to plough on. Indeed, in early August Apple became the first company to achieve a market capitalisation in excess of $1 trillion – and Alphabet was not far behind, despite recent results impacted by a $5 billion dollar fine from the European Union over the anticompetitive nature of its Android operating system. Amazon, too, has seen its share price nearly double over the past year. Tech stocks have been serving investors well.
But not everywhere, it seems. Social media has come under increasing pressure. Witness the share price collapse of businesses like Facebook and Twitter at the end of July. Twitter fell by around a quarter and, while the Facebook retrenchment was rather less, there were some difficult days as the threat of increased regulation looked ever more likely. Facebook has been an undoubted success, but its business model could be disrupted if they need to start charging for its services, rather than simply harvesting the data they hold for profit.
The rising power of tech
Artificial intelligence is the current buzz word. The ability of smart computer systems to further disrupt our world is growing exponentially.
Many seemingly safe occupations are now under threat from intelligent computers able to offer a swift and reliable service hitherto only available from us humans. Lawyers, estate agents and even fund managers are seeing aspects of their service delivery being taken over by computers that require little human intervention. Creativity and personal relationships are looking like the only secure outposts against this creeping invasion.
For the investor and their advisers the message is clear. Technological advancement is ignored at your peril. It is not just companies operating in the technology sector of which you need to be careful about. Every industry these days is impacted by technology, so understanding how their business might see change as a consequence will become an important facet for analysts.
The trouble is that the pace of change, already swift, is likely to accelerate. There will be losers as well as winners – and nowhere is this likely to be more dramatic than in the technology sector itself. I am reminded of a talk I delivered in Hull following the publication of my book nearly 25 years ago, which was based around the way in which technology was – and would – change the investment world. An IFA asked me why he needed to computerise as he had a perfectly efficient paper system. I told him that one day the insurance companies with which he dealt would only deal with him electronically. I think I won that particular debate.