Technology companies have recently attracted headlines for the wrong reasons, but regulation may matter less than innovation in the end.
In February, the second longest bull market in history suffered a short-lived correction, as inflation and interest rate fears pushed the S&P 500 down by more than 10% - it has yet to return to its January peak.1
The broader correction lasted barely more than a week but the ensuing market recovery then suffered still another setback as US-China trade tensions rose, and as news broke that Cambridge Analytica, a political consultancy, had harvested Facebook data to influence voters in the 2016 US presidential election.
As the scandal unfolded, Facebook’s share price fell by more than 20% in 11 days.2 Nor was the impact limited to the social media giant – other technology majors suffered contagion on markets as, amid growing political anger, investors fretted over the regulatory outlook.
The stock has since recovered its losses. Indeed, there may be reasons to believe that, despite the ratcheting up of political rhetoric and regulatory pressure, Facebook and its peers remain attractive investments.
“Facebook still offers good value in terms of price,” says Hamish Douglass of Magellan Asset Management, manager of the St. James’s Place International Equity fund. “The base case for a fine is $1 billion, which is pretty inconsequential for a $500 billion company. The only real risk is regulatory changes upsetting the business model.”
Douglass identifies three types of risk: being broken up by regulators; data privacy fallout; and fake news and misinformation fallout.
“Breakup is a very low-probability outcome and would probably boost the share price,” Douglass says. “On data privacy, GDPR is likely to have a larger impact on the baseline but, even there, we don’t see it having a material impact – if anything, it’ll be more challenging for the smaller players.”
Douglass acknowledges that “fake news” is a greater challenge, not least in the wake of reported Russian meddling in Western elections and referendums. However, it is hardly running shy of the problem.
“Facebook has hired 10,000 fact checkers this year and is working very closely with the major security agencies around the world,” says Douglass. “There should therefore be a lot less political interference, but it can’t be zero, and there is always the risk of politicians going rogue by making Facebook fully responsible for something they can never police.”
While Douglass continues to hold a big position in Facebook, it is just one of a number: technology stocks account for around 40% of his holdings. Yet it is a broad and diversified group, spanning ecommerce platforms (eBay), credit card giants (Visa and Mastercard) and business software companies like SAP, Oracle and Microsoft.
When it comes to the future of technology, however, Douglass believes that the majors will win the day, thanks to both their investment in research and their willingness to buy up any competitors. One of the more significant of these acquisitions was Alphabet’s £400 million purchase of DeepMind, an Oxford-based technology company, in 2014.3 (Alphabet is the parent company of Google.)
“It’s very hard to invest in artificial general intelligence – in which a computer could perform a wide range of tasks – as the holy grail is perhaps 10 to 15 years away,” he says. “Alphabet is the company putting the most into it, investing heavily in Google DeepMind, and is streaks ahead of everyone else. It also owns Waymo and is pushing driverless cars. A Waymo car travels for 6,000 to 7,000 miles before a safety driver even has to engage – Uber hasn’t got to a mile yet. Alphabet aims to have 20,000 driverless cars in the US by 2021 – it’s a great commercial opportunity.”
Yet everything, Douglass says, has its price. While he describes Jeff Bezos, the founder of Amazon, as “the greatest businessman of his generation”, he doesn’t hold the delivery company in his portfolio. He likes both sides of the business – both the online shopping channel and the lesser-known cloud infrastructure, Amazon Web Services (AWS).
“There are only three big players in cloud infrastructure as you need economies of scale,” he says. “And AWS got a seven-year head start on the others. I have deep conviction around the business, but not around the valuation. In the end, you have to buy at the right price.”
Magellan is a fund manager for St. James’s Place.
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The opinions expressed are those of the managers referenced and do not constitute investment advice. This is not a recommendation to purchase, sell or subscribe to financial instruments, an offer to sell investment funds or an offer of financial services. This does not constitute a Financial Promotion as defined by the Financial Conduct Authority. No financial decisions should be made on the basis of the information provided. The views are not necessarily shared by other investment managers of St. James's Place Wealth Management.
1 Source: Bloomberg, accessed 25 May
2 Source: Bloomberg, accessed 25 May
3 Source: Bloomberg, accessed 25 May
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