The so-called ‘Fang stocks’ sold off sharply earlier in December, prompting speculation about whether this is the start of a major correction or just a bout of profit-taking following the tech giants’ strong run.
So far the likes of Facebook, Amazon, Netflix and Google (Alphabet), have massively outpaced the wider stock market, with Amazon’s share price alone up 350% over the past five years.
Such names make up a fair chunk of the portfolios of many fund managers, who argue that the price is fair for the visibility of earnings and growth potential.
Their argument is based on the fact that the changing nature of the tech sector actually provides more stability than it does risk, as these companies are able to continue growing their market share.
The case for big tech
James Thompson, manager of the £1.15 billion Rathbone Global Opportunities fund and a big fan of Amazon, explains that far from being a risky choice, such stocks are a flight to safety at times like now. When economic growth is weak they offer stability, income and sustained growth.
‘I invested in Amazon five years ago and it has gone up nearly 400% since. Why should we listen to the bears who back then advised us not to invest in it? They missed out on those returns.’
The retail giant has even been able to deliver this performance while compromising its earnings by constantly trying to crack new markets, playing a longer-term game, he points out.
Thompson’s exposure to the sector is 22%, with major names including Facebook, Tencent and Amazon high up in his top 10 holdings. Over the three years to December the fund has returned 62.4% compared to a sector average of 41%.
Jeremy Gleeson, who manages the AXA Framlington Global Technology fund, is on the same page. He has an 88% weighting to the US, with Alphabet, Apple and Facebook as his three largest holdings, and Amazon being the ninth.
‘Facebook is on track to grow revenues by 45%, and earnings per share (EPS) by 68% this year,’ he said. ‘Right now it trades at 27x forward 12-month earnings and the stock is up 54% year-to-date. So, in fact, the share price appreciation has been lagging the EPS growth.’
He says that the multiple reflects the expectation that the company’s revenue and EPS growth will slow going forward, which is not a surprise, given their current pace – although the company has consistently surprised on the upside, beating analyst expectations.
‘In the first three quarters of 2017 it exceeded estimates by an average of 12% per quarter. For example, at the start of this year Facebook was expected to deliver 2017 EPS of $5.22 and as of now that expectation has risen to $7.03.
‘As a relative comparison, the S&P 500 currently trades at 18x forward 12 month earnings with an expectation that earnings growth is 10% in 2017 and 8% in 2018.’
This is not the dotcom bubble
Despite market commentators' concerns about the consensus trade in big tech, Neil Robinson, head of global equities at Columbia Threadneedle and co-manager of the £253 million Global Extended Alpha fund, insists the current mood is materially different from the dotcom bubble.
‘Back then we did not know what shape the internet would take and who the major players were going to be, but we do now,’ he said.
Although he believes these tech monopolies will eventually be challenged, he agrees they will remain dominant for at least the next five years.
‘The biggest challenges could come from Europe because of regulation, something the US doesn’t care about so much. The race is on to see which company develops the first trillion dollar market cap.
‘There are half a dozen candidates in the race, two of which are Chinese.’
His own bet is on either Amazon or Alibaba.
Robinson has a 13% weighting to technology; his biggest position is Alphabet at 5%, with Alibaba at a lesser 2.7%. The rest of his top 10 listings are mainly in financials, the fund’s largest sector exposure. Over three years to December the fund returned 78% against a sector average of 41%.
Not everyone is on board
He finds more safety and better income in traditional technology firms such as Microsoft and Cisco whose returns he considers largely guaranteed.
Elsewhere, Fergus Shaw, partner at Cerno Capital, says that overvaluations of technology companies today resemble previous investment obsessions.
‘The dotcom bubble teaches us that the industry is rarely aware of the extent of mania until it is too late,’ he said. ‘We are now in a world of social media and instant communication, a concept we are still exploring. Whilst companies like Amazon have succeeded, many have not.’