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‘Swipe right’ generation can point technology investors in the right direction

| Investments

Technology investors must cut through the hype and invest in secular opportunities that tie into the long-term technology trend or risk ending up with a portfolio full of ‘zombie’ stocks. Richard Clode, portfolio manager Global Technology at Janus Henderson Investors, was on hand at the sixth annual i3 Summit, hosted jointly by Sanlam Investments and Glacier by Sanlam, to talk about the investment opportunities created by technology disruption.

Clode observed that South African investors were already familiar with the tech disruption trend due to the stellar performance of Naspers. “You have a single share that returned 1 650% in just 10 years and ended up being a quarter of the JSE’s valuation, all because it invested $32 million into a Chinese tech company some 18 years ago,” he said. Naspers found itself in the sweet spot created by the “swipe right” generation. “Young people are lazy,” quipped Clode, to a ripple of laughter from the audience. “They don’t learn to drive or bother to stand in taxi queues because they can hail an uber; they don’t go to shops to browse CDs and DVDs because they can stream Netflix and Spotify; and why go to a shopping mall when you can buy from Amazon and get free delivery with a single click?”

Analysts expect the pace of technology disruption to accelerate as millennials – the very people who drive the change in how we interact for “old world” goods and services – will soon account for 59% of the global workforce. “It is this ‘swipe right’ generation that is increasingly defining the success or demise of companies – their desire to reduce friction in every part of their daily lives is contributing to the destruction of entire industries,” said Clode. This desire for “ease of use” grows stronger with each subsequent generation due to their greater immersion in all things digital and tech. Important to note for financial advisers, Clode quoted a survey result that found that 73% of US millennials are willing to buy a financial services product from a technology company.

Smart investments in technology have massively outperformed the market despite a narrow focus on only two industries. Retailers and mainstream broadcasters were the first industries in the firing line as online retailers Amazon and Alibaba – and the likes of Netflix and Spotify – tore into their respective market shares. But we are now entering a period when artificial intelligence will improve existing global technology infrastructure to challenge other traditional industries including financial services, entertainment and transportation, to name a few. How can investors make money from the coming tech disruption?

Clode identified a handful of secular technology trends that could be explored to find the next Amazon, Facebook, Google or Naspers. The first of these is linked to the roll-out of 5G infrastructure, lauded as the next step-change in mobile networks. “This technology is about the future,” said Clode. “The 5G infrastructure will take a decade to put in place, but once it is built it enables autonomous driving networks, smart factories and the Internet of Things”. He singled out Marvel Technology Solutions, a global supplier of infrastructure semiconductor solutions, as one possible beneficiary of the global 5G roll-out. Plusses include having Samsung (which is aggressively pursuing 5G market share) as a major client and the fact that 5G base stations use four to five times the semiconductor material used in 4G stations.

The advent of foldable displays should also pique technology investors’ interest. “This is the first real form factor change in the smartphone market since the Apple iPhone was launched in 2007,” said Clode. His reasoning is straightforward: Foldable display is built using OLED technology, because LCD cannot fold. But the licences, patents, technology – and some of the materials necessary – to make OLED displays are only available from US-based Universal Display Corporation. This company is described as “a pure profit play on a very nice secular growth trend.” Analysts expect an exponential increase in demand for OLED displays as manufacturers apply foldable display technologies to laptops, motor vehicle displays, smartphones, tablets and even televisions.

Ride-hailing needs little introduction and most South Africans have experience of the local branch of global ride-hailing firm Uber. But investors who chased quick gains on the recent Lyft and Uber IPOs were sorely disappointed. Instead Clode has his eye on Yandex Taxi, a relative newcomer to the field, owned by Russian internet giant Yandex. “Uber came into the Russian market and engaged in a price war. They failed and merged their business into Yandex Taxi, leaving the latter brand with 85% of that market,” said Clode. He added that the ride hailer was not only growing faster than its global peers, but doing so profitably. The Yandex Taxi IPO will take place in the next 18 months and should present opportunities for astute investors.

A common concern raised by technology investors is the possibility of a repeat of the dotcom market collapse that occurred in the early 2000s. Clode responded that today’s technology sector could not be compared to that of two decades ago. “The outperformance achieved from technology counters is driven by superior earnings growth rather than the sky-high valuations that we saw prior to dotcom,” he concluded. “Today you pay a 24% premium to the rest of the market for technology – in return for this premium you get faster growth, stronger balance sheets and the chance to be on the right side of disruption”.

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