Technology companies and listed tech stocks were all the rage during the Covid-19 pandemic as people shifted to working from home and companies adopted technology and technology services. But as Covid-19 pandemic recedes and people get back to their offices, they are ordering less food and fewer items over the internet, streaming less content, and spending less time on social media. How big a setback is all this for the tech sector?
To be sure, US-based technology stocks have had a rough ride this year. The NASDAQ Composite index — the benchmark for technology stocks — has fallen 30 percent in the year to date. Tens of thousands are being laid off at Twitter, Amazon and Facebook and a few other large technology companies.
But Jonathan Curtis, Portfolio Manager, Franklin Technology Fund, and the head of its research team overseeing technology companies, believes that things aren’t as bad as they look. Investors should not be unduly worried by the fall in share prices of US technology stocks, he adds, emphasising that the technology sector re-set currently underway in the US and around the world is a healthy reset.
The trick, he says, is to identify companies whose business models can sustain beyond the pandemic. Curtis also asserted that the US tech industry is far bigger than the FAANG and FAANG+ stocks.
Edited excerpts from a wide-ranging conversation with Moneycontrol’s Kayezad E. Adajania follow.
Layoffs, gloomy projections and a free fall in stock prices…how bad is the US technology sector right now? It’s not that bad. Yes, many B2C (Business-to-Consumer) businesses like, say Facebook, are struggling right now. The world has reopened. We’re chatting face-to-face. We’re not doing this over Zoom. That’s the segment that has slowed down. Some bit of rationalisation has happened; it is normal, it is healthy.
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On the B2B or the business-to-business side of the market, or the enterprise business, we’re seeing very good resilience. Even though we’ve seen some layoffs here as well, they’ve been comparatively modest, not nearly as bad as in the B2C space.
But it’s a healthy reset. I wouldn’t consider this to be a crisis at all.
How has stock picking changed for you as a technology fund manager through the Covid-19 outbreak and beyond as the world has now reopened? Work from home was just one part of the excitement that Covid-19 brought to the technology sector. Some cybersecurity companies benefited from there being more PCs (personal computers) out there, the PC manufacturer has benefited from people buying additional PCs to enable work from home. Broadband internet providers benefited, so did companies like Netflix because we sat at home and watched or streamed movies. Social media companies benefited because we were at home doing nothing except scrolling our Facebook pages. Those things have now slowed.
But technology is much bigger than that. Not all companies have slowed down dramatically after the Covid-19 pandemic has receded.
Businesses that might have been reluctant to embrace technology deeply prior to the crisis were forced to. They got more insights about their customers. They are pushing digital technologies into other parts of their business that they didn’t have to during Covid-19, in a reopened world. Take Microsoft. This is the world’s largest software company. It does a tremendous amount of business with the enterprise-buying centre. And in its most recent earnings call, the company said that it still expects its enterprise business to grow 20 percent this year. That’s at a time when the macro environment is slowing. Microsoft sees growth in cloud computing.
Similarly, look at companies like Oracle, ServiceNow, SAP and IBM. These digital companies will prove to be highly resilient because their business models are resilient and go way beyond Covid-19. These companies effect digital transformations and have strong recurring revenue business models that will be able to sustain their growth. They are B2B (Business-to-Business) companies and cater to other companies adapting to technology; (they have) a business model that doesn’t depend on whether people work from home or in offices.
I like to think of them as being similar to consumer staples, as being enterprise staples — businesses that will continue to get paid regardless of the economic environment.
As a technology fund manager, are there any emerging technologies that have caught your fancy these days? Are any of these companies present in India? I like Cloud computing, Artificial intelligence and Machine learning. Out of data and software and semiconductors, we are literally creating human capital that can sit alongside knowledge workers like ourselves, and make us dramatically more productive.
I would also highlight, maybe, the future of work. I know certainly video conferencing and chat tools and the like did well during Covid. I don’t know about you, but many of us still work from home by and large, if not entirely. Our employers want us in the office about three days a week. But that means two days I’m at home. And I still need to collaborate with my colleagues and track the state of work and check on things.
What about cryptocurrency and the underlying technology? This might not be the best time to bring it up given the meltdown in the cryptocurrency world, but many tech experts say the underlying technology, say Blockchain or Ethereum, could well be used in other aspects of banking and finance. What infuriates me is that a lot of shysters have shown up and taken advantage of people and gotten them to part with their hard-earned money. That does upset me. We at Franklin Templeton do not invest in cryptocurrency.
Some of the companies that we own in our portfolio have benefited from the crypto theme, but they do a lot of other things.
TSMC (Taiwan Semiconductor Manufacturing Company), which partners with Nvidia (a US-based tech company that creates interactive graphics for laptops, workstations, mobile devices and so on) has benefited from the crypto strategy.
I do think that blockchain technology and the properties that it enables — of counterparties being able to interact with one another in a trustless way and have confidence that something has occurred or will occur — is a powerful new idea that introduces the concept of ownership and the like into the internet that didn’t exist before.
The underlying technology, even Ethereum, — although we don’t own it in our portfolios — has a role in this world.
Coming back to India, many investors here look at FAANG (Facebook/Meta, Amazon, Apple, Netflix and Google/Alphabet) and FAANG+ stocks as a representation of the US technology sector and therefore their first choice of stock to be owned. Is that the right approach? This is a huge mistake that investors make in the tech space. They think technology is FAANG and FAANG+ like Microsoft and Alibaba, Tencent and Baidu. Yes, we do own some of these companies. Relative to our benchmark index, we are under-weight in large-cap companies.
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We own a lot of small- and mid-cap tech names. We believe we understand them better than our peers. These small- and mid- cap companies have tremendous long-term growth prospects and their business model strengths are under-appreciated.
That’s where we think we can generate real alpha (outperformance over the general market). And because we are right in the middle of Silicon Valley (California, US), we get unfair access to those companies. Not only big tech companies, many of which are right in our backyards, but many emerging — both public and private — technology companies in this region.
Any names that really excite you? Celonis is one such company that we have in our portfolio. It’s a privately-held Germany-based company. It helps other businesses automate their workflows.
We also like Databricks, a California-based software company. It is into machine learning and artificial intelligence. Its business is quite healthy, growing at a very good rate. It has excellent economics.
Do you think technology funds or sector or thematic funds should be in an investor’s portfolio? If yes, then how much should they own? I think that everybody should own a little bit of technology in their investment portfolios. These are really high-quality businesses, very strong balance sheets.
How much should you own? That is a decision that you need to make in consultation with your financial advisor. Ascertain your risk tolerance. It is not a good idea to have 100 percent of your assets in technology. But it is also not a good idea to have 0 percent.
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