Investors looking to add technology stocks to their portfolio should not consider the sector as homogenous and purchase stocks indiscriminately because some firms will still fail despite the growth taking place, a global investment manager has warned.
Janus Henderson Investors portfolio manager and technology sector research team head Denny Fish said the current growth in the technology sector differs from the dotcom bubble of the early 2000s and is driving a new industrial revolution, but this is being overlooked by investors jumping too quickly into the market.
“This year’s powerful run by tech stocks has drawn unflattering comparisons to the dotcom bubble of 20 years ago. However, in our opinion, there is a major difference. In contrast to that era, tech companies today seem to be delivering important efficiencies to companies and value to consumers.” Fish said.
He said these benefits were coming from technologies that make up the building blocks of the ‘fourth industrial revolution’ in which data has become a catalyst for change.
The growing pools of data available through the internet and provided by consumers are being used to help businesses make more informed decisions, which was evidenced by how many companies used online systems to keep in contact with customers and ensure their business functioned during the COVID-19 lockdowns, he said.
He said technology stocks had also benefited from larger groups of people engaging digitally for the first time this year.
“Entire cohorts of consumers who had heretofore been hesitant to interact with the digital economy had little choice but to increase their engagement during extended lockdowns. This is most evident in rising e-commerce activity, remote learning and work, as well as online entertainment,” he said.
“This increased activity has likely reinforced the competitive positions of the large internet platforms that have already invested in the technologies necessary to synthesise information gleaned from rising usage into actionable business intelligence.”
He said while this year has marked an acceleration in the maturity of technology stocks, it was still at an early stage and investors needed to choose carefully when investing in the sector.
“Just as many investors were late to recognise the opportunity presented by the large tech platforms driving these long-term themes, they also committed the oft-repeated mistake of approaching the sector as a homogenous entity. It’s not,” he said.
The later stages of the recent tech rally have shown evidence of indiscriminate buying, with little differentiation made between stocks leveraged to long-term drivers and those of legacy tech companies likely destined to see once-lucrative end markets wither, he said.
“Despite the leading role played by tech in transforming the global economy, appropriate due diligence remains an essential part of the investment process,” he said.
“An investor’s focus should remain on identifying capable management teams, understanding unit economics and – with an eye toward future growth – exploring businesses that are complementary to a company’s core offering.”
In a similar vein, BetaShares chief economist David Bassanese said investors looking exclusively at FAANG (Facebook, Amazon, Apple, Netflix and Google) stocks are likely to miss out on other tech stocks found in Australia or Asia.''