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Winds of change blowing for global tech

Glenn Freeman  |  05 Apr 2018Text size  Decrease  Increase  |  
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Even before news of Facebook’s latest transgressions hit the headlines, this fund manager reversed its overweight position on these large-cap technology companies.

“We have dramatically decreased our technology holdings, from 25 per cent to 5 per cent, and not on the back of the recent news,” says Steven Glass, head of research and portfolio manager, Pengana Capital.

Along with the FAANG stocks, this wind-back also saw it reduce holdings of more traditional technology firms like SAP and Oracle.

“Today, today we don’t hold any of those stocks, having exited them in the early part of this year. The sector has had a tremendous run over past few years--the larger tech stocks have almost all outperformed the S&P 500--and we now think the sector is priced for perfrection

“The problem with that is if even a little thing goes wrong, it can have a dramatic impact on that stock--Facebook is a prime example--and we have a laundry list of things that could go wrong [for some of the companies],” Glass says.

He believes the sector is considerably “over-owned…with technology companies now around 27 per cent of the entire S&P 500, whereas the second-largest, financials is 17 per cent”.

Investors over-leveraged

In addition to being over-owned, Glass and his colleague Jordan Cvetanovski, co-founder and portfolio manager believe it is over-leveraged.

“I think it is a reasonable assumption that there is a fair amount of investors with margin loans holding these stocks,” says Cvetanovski.

“There seems to be a view that they’re the gift that keeps on giving and nothing can ever go wrong,” but he envisions big problems if the margins are called.

In addition to regulatory and legal problems such as those impacting Facebook, other considerable risks for technology companies include growing competition and consumer fatigue.

Pengana sees other potential scenarios it labels as “other”, such as possible fraudulent online advertising and other issues that could come to light.

Consumer data weaponised

The current legal challenges surrounding Facebook and its on-selling of users’ data to Cambridge Analytica is part of a broader realisation from customers.

“The consumer didn’t realise…but when something’s given for free, you can assume that you are the product.

“What’s really come to light with CA is they’ve suddenly stepped on government does, and when government is worried about the weaponising of this data, then suddenly there’s a lot more interest in stopping this,” Glass says.

He also points to Europe and the gradual process countries in the region have been following in tightening restrictions on Google,

“I think the US will now follow through. It’s a big deal, and it’s unknown how this will end,” says Cvetanovski.

Glass draws comparisons between the current shift in government and consumer interaction with network technology firms like Facebook, Google and Amazon--and what happened to US telecoms giant AT&T in the 1980s.

Turning to Amazon, Glass and Cvetanovski see problems around the valuation metrics some analysts use to value the company at $750 billion.

Amazon has two major parts: the web services business AWS, and the better-known online retail arm.

“Some analysts say AWS is worth $250 billion dollars--at that price it’s 10-times revenue and equal to two SAPs. Under that reasoning, the retail business is worth $500 billion dollars, which would mean it has to double its retail sales this year.

“The key point is….for Amazon, can it do this? Yes it could, but it would be an unprecedented level of success,” Glass says.

Glass and Cvetanovski also see an existential threat in the disruptive business model that are intrinsic to businesses like Amazon and its fellow FAANGs.

US President Donald Trump weighed in recently, criticising Amazon for essentially ripping off taxpayers through its reliance on the US Postal Service. Amazon founder Jeff Bezos also happens to own the Washington Post, a newspaper that has been broadly critical of the Trump presidency.

“The problem with all this is, I think amazon has reached a point where it’s become a lightning rod for criticism; this whole wealth divide in US, and we think it’s a big part of the problem.

“One in 10 US jobs is in retail, and Amazon’s business model needs only half the employees of traditional channels.

“Given that its whole reason for being is not just take market share but to displace the whole existing infrastructure of certain verticals, they are really going for total domination…and President Trump is clearly seeing this effect,” Glass says.

He and Cvetanofski see problems of a similar scale for online content platform Netflix, ride-sharing network Uber and accommodation platform AirBNB.

“We’re not saying they’re overtly negative, but they’re expensive, they’re facing some known unknowns, and we just don’t know how the business models will adapt to this…the next 10 years won’t be as easy as the last 10 years.”

Glenn Freeman is a senior editor at Morningstar.

© 2018 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication.

is senior editor for Morningstar Australia

© 2020 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782. The article is current as at date of publication.

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