Technology: Seeing through the noise
10 March 2020
2020 will be defined by volatility due to continued uncertainty (COVID-19, monetary intervention etc). Quality will again trump value. For the long-term investor, these are transient issues that introduce noise. We have detailed a framework to analyse software and software-like models, dive into the changing landscape of video games, pick the most ESG-worthy tech stories, and highlight trends with a bias to pragmatism.
•Expensive tech outperforms. We often tend to underestimate the impact of technology in the long run. As a result of this underestimation, we continue to see the tech sector outperform. However, it tends to be the expensive tech companies, rather than the cheap ones, that drive outperformance. This is due to cheap tech stocks rarely being able to resolve their issues, especially if it is related to product- market fit. Therefore, we continue to caution investors against turn-around stories.
•The Rule of 40. Global earnings growth continues to be disproportionately attributable to the tech sector. As such, every company now wants to be one, but of course, not all are. The Rule of 40 is a useful framework for identifying true tech companies, especially software. This rule of thumb states that these companies should approximately have a combined FCF margin (excl.tax) and revenue growth equal to 40%. If they do not, it raises the question: why?
•Video gaming revolution. This fast-growing industry continues to evolve. Over the few past years, it has been about the transition to Games-as-a-Service (GaaS). We are now on the precipice of even greater change, with the promise of cloud gaming. This will not only lower barriers and expand the market, it will upend business models once again, challenge excessive platform fees, and create new winners and losers. Even though cloud gaming will remain niche in the near term due to tech constraints, we believe its impact will be monumental in the long-run, benefitting all our gaming coverage.
•Environmental, social & governance (ESG) no longer just ‘nice to have’. ESG is now an ever more important consideration for companies and investors. In this movement, technology companies will play a key role, as they make positive ESG contributions in multiple ways. Under our coverage, we find seven interesting ideas. Blancco allows for the re-use of servers rather than wasteful disposal, Craneware helps align hospital’s incentives with patients, and Gamma reduces travel emissions with its communication tech.
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