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Which tech funds to invest in

Which tech funds to invest in
(Reuters)

Legend has it a young Isaac Newton was sitting under an apple tree when he was hit on the head by a falling piece of fruit. It was this moment of serendipity that led him to come up with his law of gravity and the rest, as they say, is history.

Having recently lost its title as the world’s largest company, Apple is being reminded of those same gravity laws in the first few months of 2022. It is also a useful nudge to investors that what goes up can come down.

Tech stock declines

Having become the first company to reach a market-cap of $3tn (£2.3tn) in January, Apple is now down almost 23 per cent year-to-date, but it is not alone. Meta (Facebook), Amazon and Alphabet (Google) are down 46, 37, 27 per cent respectively. Poor old Netflix is down almost 69 per cent.

In a nutshell, tech is being hammered as Federal Reserve hikes hit growth, inflation presses the consumer and geopolitical uncertainty hits demand.

Then there is Covid, the ultimate catalyst for accelerated adoption of tech. The truth is we do not know what the new normal post this seismic event in our lives is and whether tech companies have over-extended themselves in assuming the current levels of increased demand are sustainable.

Clearly tech has had an amazing run; there is a reason the FAANMGs account for around 20 per cent of the S&P 500. But now they are out of favour, the doom-mongers seem overly eager to point to the 2000-03 technology sell-off – imaginary bubbles are bursting everywhere once more.

Could they rise once again?

So, are we now in an environment where tech is in decline? In a word, no, and there is a host of reasons why not, so I will try and be concise.

Let’s start with the obvious: tech remains an integral part of our everyday lives and will only grow in influence in our attitudes to work, social interaction and e-commerce.

We must also understand that the tech that now dominates the market is very different to what was in the 1990s and early 2000s. When the internet was in its infancy, many tech companies had no cash flows in their business models and had no customers.

We were relying heavily on blue sky thinking back in those days. Today, these tech businesses are making money and are fundamentally good businesses.

Valuations were also far higher in 2000, with average price-to-forward earnings at 113 times, compared to 40 times in November 2021. That is without talking about the generational shift seen in the past 30 years, accelerated by the Covid pandemic.

Cloud-based architecture, digital payment technology, and AI-enabled automation are the bedrock of many companies and people’s lives.

Valuations today are now looking pretty cheap for these businesses. For example, Meta is arguably a value stock. I would estimate it is probably trading on something like a free cash flow yield of circa 10 per cent and has a ton of cash on the balance sheet.