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Tech shares: should you follow the hype?

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20/05/2013
Investors are showing interest in technology shares again. We look at the potential for returns in the sector.
Tech shares: should you follow the hype?

Since the start of 2013, seven of the top ten traded shares on the Barclays Stockbrokers’ International Trader platform have been technology companies.

Big name brands such as Apple, Facebook and Google have attracted investor attention, with a staggering 81% of Barclays Stockbrokers’ clients showing an interest in technology shares, according to a recent survey.

Paul Inkster, head of product at Barclays Stockbrokers, said: “Despite a mixed set of first quarter results announced by some of the leading technology brands, demand for the technology sector is strong.

“Investor focus is on the sector once again as Facebook approaches the first anniversary of its initial public offering (IPO), and we expect to see further developments as brands continue to innovate.”

It has been anything but an easy decade or so for technology companies. The bursting of the dot-com bubble in the late nineties left many investors scarred and unwilling to re-commit to the sector.

But appetite appears to be returning thanks to a number of exciting themes emerging in the technology space.

Andy Parsons, head of investment research at the Share Centre, says: “An example of the opportunities the sector has to offer is the growth of data and mobile phone usage.

“These products are now embedded into our everyday lives with people preferring to reduce budgets elsewhere than surrender their personal phone or tablet.”

The evolution of 4G on mobile devices – a service which means content can be downloaded quicker and users will no longer have to endure slow websites and buffering screens – is also expected to boost the sector.

Demand for data centres will be another important theme as investment in Cloud services and global positioning grows.

Parsons says: “As companies in this increasingly connected global world seek to compete, private company investment in technology is expected to increase. Advances in mobile computing, social media, data management and analytics, information technology and cloud computing will all have a part to play in this.

“Cloud computing is expected to have a significant impact on companies in the years to come. This will improve competiveness and reduce high IT infrastructure overheads. Data protection and security are major concerns, but it is the continual technological developments that will ensure that Cloud computing may well become the new norm.”

There are of course risks associated with such a fast changing sector.

Morningstar OBSR, the investment research company, says the speed of change and innovation can be brutal for companies who do not keep up with progress; an example of this is the impact Apple’s iPhone has had on Nokia and more recently the impact of the iPad on the notebook market.

However, strategists at fund group, BlackRock, say the technology sector looks inexpensive, and believe the sector “offers good long-term value, despite higher volatility”.

Tech shares will, like all other investment, however, be sensitive to macroeconomic conditions.

Despite this, analysts believe that the fundamental backdrop for technology equities looks attractive. Company balance sheets are healthy, cash generation is strong and demand is consistent while shares remain inexpensive.

 

Where to invest?

Despite a recent drop in profits for the first time in a decade, Apple remains the most commonly traded international stock.

Fund managers say investors interested in tech ‘super’ stocks need to be careful how they play the brands.

Ian Warmerdam, fund manager of the Henderson Global Technology fund, says: “We have an underweight position in Apple. Whilst the company’s ecosystem such as iTunes means existing Apple users are reluctant to change, we are mindful that Apple needs to remain innovative if it is to gain new followers.

“The iPhone is beginning to face stiff competition from rivals whose products are cheaper and with similar functionality. That said, Apple is sat on a huge cash pile, is relatively inexpensive and offers a dividend. We would like to see Apple regain its brand advantage through product innovation and marketing.

“A new smartphone that helps bring more Asian customers onto Apple’s ecosystem and signs it is winning the corporate tablet market could help create better earnings visibility.”

Warmerdam is more bullish about Google: “Google continues to dominate search in many parts of the world and has successfully translated this into profits through AdWords, its targeted advertising business.

“Google should therefore be well placed to profit from the internet continuing to increase its share of global advertising spend. The global rollout of LTE (4G) networks will lead to substantial improvements in the consumer experience of mobile internet.

“This seamless connectivity should create huge opportunities for innovative technology companies such as Google, which also owns YouTube, Motorola and the Android operating system.”

Other tech companies that Barclays Stockbrokers clients have been investing in are: Research in Motion – a designer, manufacturer, and marketer of wireless solutions for the worldwide mobile communications market; Organovo Holdings Inc. – which focuses on bioprinting technology and creating tissue for research and medical applications; and American multinational information technology company, Hewlett Packard.

Funds to play the technology sector

Both Morningstar and the Share Centre highlight Henderson Global Technology fund as a good way to play the tech sector.

Morningstar also highlights Polar Capital Global Technology fund and GLG Technology fund as good investments into the sector.

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