Let’s look at what we believe are the top 3 misconceptions about technology shares and address some of the confusion about investing in technology shares.
This information does not take into account your personal objectives, financial situation or needs. You should consider if the relevant investment is appropriate having regard to your own objectives, financial situation and needs.
As an investment team, we have 50 years of markets and investing experience having managed $2 billion of investments during our careers. Over this time, we’ve invested in lots of technology shares around the world.
Without a doubt, it is one industry that many investors seem to be confused by or afraid of. We’ve even heard “experts” say to some people “don’t invest in any technology shares”. We think this type of talk is potentially quite detrimental for investment portfolios because we believe technology companies are the 21st century’s blue chip shares.
Misconception #1: Investing in technology shares is a crowded trade and they are set for a fall
The reasoning goes that we’ve been in a low growth global environment for years so many investors have bought technology shares to get growth. Once the global economy picks up again then investors will sell technology shares and buy shares in more traditional industries that will grow quickly as the economy improves.
The main issue with this argument is it ignores the fundamental shift and disruption that technology companies are causing. Even if we experience a dramatic improvement in the global economy, technology companies will very likely continue to take market share from traditional industries.
Let’s take the retail industry as an example. When the U.S. emerged from its deep recession following the GFC, U.S. retail sales increased by 5.2% in 2010. A very strong standalone growth by any measure. However, compare that to U.S. online retail sales which grew 16.7% in the same year. Over the subsequent years, U.S. online retail sales has always grown at double digit percentages every year but traditional retail sales have fallen back to low single digit growth.
Technology is not just a discrete industry, it is the 21st century’s disruptive force that will impact all other industries. Although there is some current conjecture about technology being a “crowded trade”, we do not believe that is a sufficient standalone reason to dissuade investors from investing in technology shares for the long term.
Misconception #2: Technology shares are not worth investing in because they don’t pay regular dividends
Most global technology companies (e.g. Amazon, Facebook) have never declared a regular dividend for shareholders. The only form of potential investment returns for investors is through share price growth. If you are used to decent levels of regular dividends from large ASX listed companies, this might be a concern.
Like all things in life, successful investing is about getting the right balance. Regular dividends from large companies are great. They provide regular income to you and a sense of stability. However, if you avoid investing in technology shares completely just because they don’t pay dividends, your investment portfolio might miss out on exposure to long term capital growth that technology shares may be better placed to potentially deliver.
Let’s look at a hypothetical example by comparing a $10,000 investment 5 years ago in Wesfarmers (operates Australia’s largest retailer and consistently pays dividends) and Amazon (the world’s largest online shopping company).
Past performance is not an indicator of future performance
There is a good reason why global technology companies like Amazon don’t pay dividends. They re-invest it back into the business to keep growing whereas traditional Australian blue chip companies focus on providing regular dividends to investors.
Misconception #3: Technology companies are too big to grow fast
Some people believe technology companies like Amazon and Facebook are now getting so large it will be difficult to keep up their pace of revenue growth. If a technology company can’t keep growing at rapid rates, arguably it doesn’t justify their current share price.
While this might be true for some technology companies that are not driven by a disruptive vision, we don’t believe it is the case for many of the well-known truly disruptive technology companies. We believe these companies have at least a decade of strong growth ahead of them as they help transform the way people live their lives around the world.
Let’s look at 2 examples.
Facebook – Is it at a saturation point?
A common argument against investing in Facebook is ads have reached a saturation point on the platform i.e. users will get annoyed if any more ads are displayed on their newsfeed. To keep growing revenues in the future, it will have to increase the price of advertising.
We agree that Facebook will steadily increase the price of advertising, which by the way, is a good thing for its revenue growth. What we don’t agree with is the point about advertising saturation on its platform. Facebook has not even started to make material revenues from some of its key platform features that will drive user engagement in the next decade e.g. WhatsApp, Facebook Messenger and Instagram, may accumulate more users than Facebook in the long term.
Amazon – Surely it can’t keep growing so fast?
Amazon has an unbroken 20 year streak of double digit percentage revenue growth. For a company that is worth around A$600 billion, that is quite an achievement. A common misconception against investing in Amazon is that revenue growth will soon drop off given the growth has been driven by taking market share from traditional retailers and there is a finite amount of market share to be taken.
What isn’t commonly known is that even in a developed market like the U.S., only 9% of all retail goods and services (by value) are sold online. In other words, there is still 91% of retail goods and services sold offline that online retail companies like Amazon can take market share from. If Amazon keeps executing like it has in the past, there is no reason why it can’t continue double digit percentage revenue growth over the next 5 to even 10 years.
To Sum Up
There are many misconceptions about technology companies, how they make money, how they pursue growth and whether they are worth investing in. Some people place them in the “it’s too hard so don’t invest” basket. At AtlasTrend we have a different view.
Consider this, in your day to day life can you imagine living without services like Google, social media, or online shopping in the next 10 years?
Whether we like it or not, technology companies will increasingly be a major part of all our lives in the 21st century. For that reason alone, technology shares should be part of the core holding in your long term investment portfolio.
In a follow-on article that is coming soon, we will be exploring how to pick technology shares to invest in. We share with you why we are currently invested in companies like Facebook, Amazon and Alphabet (Google’s parent company) and avoided companies like Tesla and Netflix.
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