Please see the below article from Blackfinch providing an overview of Technology Sector Stock performance, and their input on the future of the Global Technology Sector for investors. Received yesterday evening – 30/08/2022
Within the Blackfinch Asset Management Team, we are often asked for our views on the outlook for global technology stocks. The global technology sector is rich with forward thinking leaders and innovation in their respective fields. We’ve historically seen heavy investment into research and development (R&D), focused on launching unique and market-leading products that will generate substantial and sustainable positive cashflow well into the future.
Naturally, these companies are expected to grow their earnings and sales at a faster rate than the rest of market. As such, the shares of tech companies can look ‘expensive’ as they trade at a higher price-to-earnings (P/E) ratio than many of their less expensive or lower growth counterparts. Even with a higher-than average valuation, the long-term outlook for these tech companies can prove attractive if they continue the trend of strong expansion and ultimately share price growth.
Technology companies – particularly in the US – enjoyed significant share price growth at the onset of the COVID-19 pandemic. When the pandemic shook markets in March 2020, many companies were catapulted into the future, as they were forced to implement digital transformation across their business models. Market demand evolved almost overnight, the typical ‘office work environment’ became a thing of the past, and many tech companies offered an immediate, effective and efficient solution to the new challenges faced by consumers and businesses. While other sectors struggled, many of the largest tech companies reaped the reward of this market shift. For example, Amazon lapped up the heightened demand as their infrastructure could withstand this newfound supply pressure. Amazon enjoyed a near 38% increase in annual sales in 2020, and a subsequent 76% surge in its share price for the year.
This narrative of adaptation continued in 2021, when companies placed a greater emphasis on improved workforce transparency and flexibility. Firms needed their employees to reorientate and reskill to optimise their remote work outputs, and business leaders embraced advanced technology such as Artificial Intelligence. This activity was immediate and reactive, due to the unnatural impact the pandemic had on company cashflow.
The first half of 2022 saw several well-managed tech companies that fit the ‘growth’ profile experience a mass sell-off. In some cases, share prices were unfairly punished. However, this has created ample opportunities for active managers to pick up these typically ‘high valued’ names at a lower premium than in recent years.
In our view, this is an important year for these technology companies to adapt and innovate, with sustainability being a key theme. This can be achieved through many ways, such as embracing cloud computing to drive transformation, adapting their supply chains to account for future uncertainty, and focusing on reducing their environmental impact. The fundamentals of a technology company have become even more important for investment, which we explore below.
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Alex Kitteringham
31/08/2022