OPINION: Investing in the Fourth Industrial Revolution: Part 1
WORDS ON WEALTH
Much is made in the media – including in this column – of the exponential growth of companies and industries that are developing or harnessing new technologies and riding the wave of the so-called Fourth Industrial Revolution. It seems obvious, particularly for young adults at the beginning of their careers, and whose careers may be grounded in the new technology, that this is a good place to invest.
Investment experts would agree that, yes, you need to be invested in companies riding this wave. But it’s not as easy as you think, and although, if you do it right, you’re likely to earn substantial returns over the long term, you could also go horribly wrong.
Bear in mind that you will not necessarily be investing in technology companies as such. Across industry sectors technology-driven start-ups are challenging the dominant players, which themselves must adapt or die. Think media companies, retailers and banks.
Richard Clode, the co-manager of the technology portfolio at Janus Henderson Investors, a global asset management firm based in London, is an expert in tech-related stocks. Speaking at the recent Sanlam i3 Investment Summit held in Gauteng and the Western Cape, his message, in a nutshell, was: “You ain’t seen nothing yet!”
Clode said technology was opening up huge markets globally. Citing one study, he said 75% of millennials would choose a tech company over a traditional financial services company when buying financial products.
Few people outside China know that the world’s biggest financial company is Ant Financial, the financial arm of Chinese tech conglomerate Alibaba. It’s bigger than global asset manager BlackRock or US bank Goldman Sachs, with a valuation of $150billion (R2.1trillion). In March, the Wall Street Journal reported that Ant’s money-market fund was the biggest in the world, with more than 588million users of its payment network Alipay (more than a third of China’s population) contributing to it. In January it held assets of about $160bn.
Clode also cited online gaming as a sector to watch. Gaming was spawning multi-billion-dollar franchises, and in the East it has become a highly popular spectator sport, with winners earning as much as Wimbledon champions.
To invest successfully in tech stocks, you need to cut through the hype, Clode warns. For example, we have made big advances in artificial intelligence (AI), but AI is “going through a lot of teething issues and struggling to keep up with the hype surrounding it”.
He says: “Investors love to fall in love with a new technology – even the best stocks get overhyped at times. When such companies disappoint, they can go down a long way. But after a correction, there is an opportunity to pick out the gems from the zombies.”
He says there is now so much out there that you can afford to be selective, steering away from over-hyped and overvalued companies.
Millennials were in primary school when the dotcom bubble burst in the early 2000s, and may not be aware of a certain caution among older investors regarding tech stocks.
But Clode says you cannot compare today’s tech boom with the dotcom bubble. The difference, he says, is profit. Today’s successful companies, such as Amazon, Apple and Alphabet (Google), have made huge profits and built up enormous cash reserves. This abundance of cash supports large research and development projects, which in turn fuel technological progress, creating a “virtuous cycle”.
Gerrit Smit, the head of equity management at family office Stonehage Fleming in London, is also of the view that we are far removed from the dotcom bubble. Speaking to journalists at a recent media conference, he said some of the so-called FAANGs (Facebook, Amazon, Apple, Netflix and Google) are not classified as tech stocks, but as services companies. These and similar businesses have become far more cash-generating and sustainable than those of the 2000s.
Because of the way successful tech companies tend to transform to stay competitive, Smit questions whether they are as overpriced as some market commentators suggest, believing that their future growth – possibly in new directions – may have not been fully factored into the share price (see “Amazing Amazon”, below).
Contrary to the time of the dotcom bubble, Smit says, echoing Clode, we are spoilt for choice in tech and associated companies, and therefore don’t need to take the risks that the dotcom investors did.
Smit sees a long phase of investment opportunity in fintech (tech-based companies in the financial services sector). He says that while the West has been slow off the mark, possibly because of tighter regulation, financial services offshoots of established tech giants will, like Ant Financial in China, emerge and take away business from traditional asset managers and banks.
On the other hand, for platforms offering a service, such as Airbnb and Uber, the challenge is to have a competitive edge, and barriers to entry are very low. “It’s difficult to work out what the competitive edge is for these companies,” Smit says.
Amazon was founded by Jeff Bezos in 1994. The company started as an online bookstore, operated from his garage in Bellevue, Washington State. The servers he used required so much power that Bezos and his wife couldn’t switch on a hair dryer or vacuum cleaner without blowing a fuse.
The company grew quickly, and in 1997 it went public, expanding to sell a full range of retail products.
It turned its first profit only in 2001, seven years after it began: $5million on revenues of more than $1billion.
In 2015, Amazon overtook Walmart as America’s biggest retailer by market capitalisation.
Amazon today is far more than an online retailer. Through acquisitions and its own development, it has branched into electronics, publishing, film and television production, and, importantly, cloud services (web-based storage and computing platforms).
Amazon’s cloud-services subsidiary, Amazon Web Services (AWS), dominates the public cloud market, with 41.5% of market share. It is Amazon’s most profitable division, although the bulk of its revenue continues to come from its retail business.
Amazon listed with a share price of $1.50 in 1997. Today, you’ll pay more than $2000 for a single share.
Sources: Wikipedia, Business Insider, Britannica, Visual Capitalist
Part 2: Where to invest