EquitiesMay 28 2013

The rise in supremacy of ‘super techs’

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A year on from the Facebook flotation – the largest US internet share listing of all time with a total size of $16bn (£10.4bn) – the rise of ‘super tech’ companies is changing the face of the US stockmarket.

According to Renaissance Capital’s list of the 10 largest US internet initial public offerings (IPOs) of all time, half have come to market in the past two years including Facebook, as well as Groupon in 2011 with a deal size of $700m.

But, in spite of its large IPO, Facebook sparked controversy over whether there was actually any value in the increasing number of digital ideas coming to market, especially as the social network’s share price started falling almost immediately. A year on, Facebook’s share price has dropped by a third from $38 to $26.68.

Jeremy Gleeson, manager of the £213.9m Axa Framlington Global Technology fund, says: “Facebook is an interesting one. I certainly scratched my head over its valuation last year when it went public. I felt there was not enough hard evidence that the management team was going to be able to monetise what was a fantastic user base.

“Added to that, I felt they directed the IPO very much at the retail market,” says Mr Gleeson. “The problem is the deal broke issue price very quickly and that investor base is not the type to step in and buy more stock on the basis it’s cheaper; they are the type that would sell. So it was almost like a perfect storm for the company.”

Jake Robbins, manager of the Premier Global Alpha Growth fund, notes that ‘super tech’ companies “have always existed and, by definition, have changed the face of technology. They all have one thing in common, however, and that is first-mover advantage in a ground-breaking and soon-to-be-mass-market industry.

“Google became the dominant provider of software to enable consumers to better utilise the vast amount of information on the internet. Facebook, LinkedIn, Twitter, etc are now pushing the boundaries of social interaction online.”

But of the tech stocks that warrant the ‘super tech’ label – Google, Groupon, Facebook and LinkedIn – only Google appears on a regular basis in the top-10 holdings of retail technology funds.

Ben Willis, investment manager and head of research at Whitechurch Securities, notes: “Google is a different business model, initially making its name as a search engine but also becoming involved with cloud computing, online advertising, as well as backing and then owning the Android operating system.

“The issue with LinkedIn and Facebook is that although they have millions of users, how can you extract revenues from their respective user bases? Using Facebook as the example, if they can work this out then the company obviously has huge potential considering its user base.”

He adds, however, that most tech managers are “acutely aware of this conundrum” and so avoid buying into these companies at IPO.

Google remains the ‘poster child’ of internet companies. In 2004 it was one of the first to go public after the dotcom crash and, according to Mr Gleeson, has demonstrated dominance in its core business.

“When they went public they were growing roughly 50 per cent a year and valued on a 40 times-type of multiple. Today they’re growing at roughly 20 per cent a year and valued at 16-17 times multiple. So the multiple has shrunk considerably in the past few years, but the share price has gone up considerably because of the earnings growth in that time,” he explains.

Meanwhile, a year on, Facebook is looking more attractive than at flotation, with a lower share price, three sets of good results and evidence it’s monetising mobile traffic.

Mr Gleeson notes: “I’m more positively disposed to Facebook now because I think there is a wall of advertisers that will move to platforms such as Facebook. I think they’ve got a few years ahead of them to be successful.”

The manager points out that the way ‘super tech’ companies will be successful is by monetising something that has been done in a different way in the past. He adds: “I wouldn’t be surprised if in the next five years another handful of firms, with innovative new ideas, have the ability to get valuations and market caps in the order of magnitude of the LinkedIns, Groupons and Facebooks of this world.”

A long-term investment horizon seems key when thinking about ‘super tech’ investing, but with technology constantly evolving, the challenge is whether to invest now or wait until the next technology cycle emerges. The only question is what and when that will be.

Nyree Stewart is deputy features editor of Investment Adviser

RISE OF THE SUPER-TECHS: HAVE THEY RUN OUT OF STEAM?

Philip Pearson, manager, GLG Technology Equity fund

“Facebook’s recent results demonstrate not only solid progress in usage and engagement, but they also marked a third consecutive quarter of year-on-year advertising growth rate acceleration. Moreover, mobile revenues have grown and, having represented 2 per cent in the second quarter of 2012, now account for 30 per cent of total revenues.”

Nick Evans, manager, Polar Capital Global Technology fund

“New technology cycles tend to occur every 10 years or so, each being driven by a reduction in the cost of delivering computing, and I believe we are at the start of one of these cycles. The latest innovations are focusing on cloud computing, social media and mobile devices. Investors will need to look outside the traditional technology indices and broaden their definition of a technology company.”

Stuart O’Gorman, manager, Henderson Global Technology fund

“Apple is sat on a huge cash pile, is relatively inexpensive and offers a dividend. We hold roughly a 5 per cent position in Apple in the portfolio but we would like to see it regain its brand advantage through product innovation and marketing. A new smartphone that helps bring more Asian customers into Apple’s ecosystem and signs that they are winning the corporate tablet market could help create better earnings visibility.”