The tech bull market: out with new, in with the old?

This article is part of
Guide to US Equities

The tech bull market: out with new, in with the old?

Investors contemplating the outlook for technology stocks will forever remember 1999 and 2000, when a wave of hype drove the valuations of companies engaged in the provision of new technology to all time highs, and then to crushing lows. 

Since the end of the global financial crisis a fresh burst of optimism has gripped the US tech sector, aided by plentiful liquidity, and several of the largest US technology companies are among the largest businesses on earth, while also leaving behind a trail of sceptical investors, concerned about the valuations.

FANG stocks

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Tom Slater, head of US equities at Baillie Gifford, and manager of several funds that have large exposures to US technology stocks, and specifically the group of companies known as the FAANGs (Facebook, Amazon, Apple, Netflix, and Google, although not everyone includes Apple, which makes the group 'FANG').

He says the major difference for investors now when compared with 1999 is that: “In 1999, really the challenge the investor in technology stocks faced was to try to pick the companies that would win from the rise of new technology, but the difference now is that when it comes to technology, we know who the winners are, so it is not like 1999 at all.”

The outperformance from the FANG stocks was as a result of huge and unexpected – by market standards – disruption-led growth --- Tom Wildgoose, Nomura

Charles Jones, who runs the Waverton Global Equity fund said: “The attractiveness of the internet is that a small amount of capital can be used to deliver a strong value proposition to customers and build a large business extremely quickly, generating high returns on capital and a very great deal of money for investors." 

To varying degrees, all of the FANG stocks have capitalised on this.

Many of the ‘old tech’ companies were founded before the creation of the internet and have either manufactured physical computing equipment or sold software under licence.

The ‘old tech’ businesses which have flourished, most notably Microsoft, have worked hard to sustain or improve their value proposition through investing in ever more impressive hardware, or delivering software in more efficient ways to the end customer (more recently through cloud infrastructure and the Software-as-a-Service model). 

The continued advances in not only consumer and enterprise technology but also industrial automation, will likely remain rapid and a key source of ongoing efficiencies for customers, so that any technology business with a strong or improving value proposition should be able to continue to grow profitably and remain a winner for adviser portfolios.

Conversely, any business which fails to sustain its value to customers may be a very poor investment.

In 2019, Netflix has been the weakest performer since the arrival of new consumer streaming services has eroded its value to the customer, whilst Microsoft and Facebook’s value proposition has remained strong (despite regulatory concerns around the latter) and they have delivered significant share price appreciation to investors. 

In short, it is perhaps better to avoid thinking of ‘FANG’ vs ‘Old Tech’, and focus on how much a company’s product or service is desired by its customers.