The changing of the guard in technology sector is well under way, with three quarters of its constituent companies listed seeing declining growth.
While the maturity of these once fledgling tech businesses may provide investors with a level of comfort, there is also the risk that they overpay for stocks well past their peak, warns LO Funds – Technology fund manager Bolko Hohaus.
‘A sobering thought is that 75% of the constituents by market cap of the Morgan Stanley Information Technology index are behind their break points in terms of innovation,’ he said. ‘In other words, the best years for investors are behind them.’
Apple, which Hohaus exited last January, is the most notable example, he said.
‘Two thirds of its profit comes from one product – the latest iPhone – which generates super normal margins. But Apple has no new blockbuster product in the pipeline to compare. While it can still raise dividends and do buybacks, the big growth years are finished.’
Despite selling a record number of iPhones and iPads in the fourth quarter, Apple’s stock fell by over 8% on the announcement late last month as investors became nervous over growing competition in the mobile devices market and the lack of a new killer product.
Hohaus believes rival Samsung has a developmental advantage because it makes more of its components in-house, but warns it will face the same issues as Apple in the future.
The Korean tech giant’s shares lost 10% in the two-week run up to its Q4 guidance, as analysts correctly predicted a fall in growth for the first time in two years.
Hohaus is favouring Lenovo, a Hong Kong-listed smartphone manufacturer that is buying Motorola’s handset business.
He points to the unlisted Chinese firm Xiami as another company that could erode Apple’s margins. It produces high-end smartphones for less than half the price of an iPhone.
But while Hohaus believes many of the tech old guard are no longer attractive from a growth perspective, he is finding plenty of opportunities in the sector. He points to the trend of machine-to-machine data exchanges as a high growth area, highlighting ARM, Littelfuse, Siler Spring and Nordic Semiconductor.
He is also backing cloud computing software demand through Service Now, digital advertising growth through Pandora, and robotics, where he favours Kiva, which carries out Amazon’s stock fulfilment.
The LO Funds – Technology fund has returned 44.3% over three years in dollar terms, ranking it 8/113 in the Citywire Equity - Technology sector.