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Newton’s Clay: Why older can be better in tech trends

Investors keen to ride the tech boom often seek exposure to shiny, new, high-growth start-ups. But the more mature companies in the sector can offer high growth, income and access to the trends shaping the world, says Nick Clay, manager of Newton’s Global Equity Income strategy.

Investors keen to ride the tech boom often seek exposure to shiny, new, high-growth start-ups. But the more mature companies in the sector can offer high growth, income as well as access to the trends shaping the world, says Nick Clay, manager of Newton’s Global Equity Income strategy. 

We believe companies in the mature technology sector can offer an asymmetric way to play the themes of mobility, infrastructure and smartphones for the simple reason that there is little expectation of meaningful earnings growth in their valuations. However, a number of mature or ‘old-name’ tech companies are interlinked with the growth potential of many newer forms of technology and as such, we believe their growth potential may have been underappreciated. 

Theme #1: Smartphones

In terms of cutting-edge smartphone technology, instead of playing the growth potential through the individual best-of-class companies like Apple and Huawei, we do so through a company like Qualcomm. Qualcomm is the owner of a vast swathe of intellectual property in terms of smartphone functionality. What makes it such a good prospect today is that it is a leading innovator in 5G technology, which will be the next big technological roll out across tablets, smartphones and other devices. 

Qualcomm is a company that is device-agnostic, which means we do not have to take a view on the future growth prospects of any one smartphone producer, but instead, we are positioning to benefit from the future growth potential of 5G, which we see as a revolutionary step forward in mobile technology.

We believe the relative financial health of Qualcomm is another key attribute. Its financial status is such that it is purchasing back up to 30% of its stock - despite spending significant sums on research & development, which makes it a company with high barriers to entry. Qualcomm is already the technology platform of choice for 3G and 4G operators, and in the current transition to 5G, all new devices will need to have Qualcomm intellectual property within them to be able to operate across all platforms. 

Theme #2: Infrastructure

Like Qualcomm, Cisco Systems is another mature name in the technology sector. It has become good value on a relative basis because much of the market has become obsessed with The Cloud, as dominated by Microsoft and Amazon. What is compelling for us however, is that with the rapid rise of ‘smart cities’ and the internet of things, the areas where bottlenecks are occurring tend not to be at The Cloud end of the technology spectrum, but at the cutting edge: in other words the cars, cameras and various back-up systems that have a heightened need for instant processing power. Cisco’s business is all about connecting everything that sits within this smart world, and getting different technologies to ‘talk’ to each other.