Emerging companies in the technology sector are often heavily overestimated, according to tech investor Richard Clode of Janus Henderson. “The trick is to remain cynical,” he said. Remarkably, he said he also sees opportunities in emerging market companies that have yet to go public.
“Investing in technology is a soft-skill,” said Clode, portfolio manager of the Janus Henderson Global Tech Leaders Fund. “You have to have a “feel” for the opportunities in the market. That can’t be done mathematically. Of course the technology investor uses the classic finance models, but investing remains a people’s business.”
In the conversation, he recalled his meeting with Jack Ma in 2007 who took his company AliBaba to the stock exchange in 2014. “For seven years we listened to his story. When the company was offered on a silver platter by investment bankers in 2014, we had been studying Ma’s corporate culture and management style carefully for years.”
According to Clode, hard, classical financial parameters are not enough to properly manage a technology fund. “It’s my job to see how realistic the story is of a Chinese 23-year-old school leaver who says he wants to and can found the new Apple.”
“Decisions cannot be made on the basis of Excel files and models. There are softer parameters to take into account. In that respect, investing has always been a soft-skill, otherwise we would be replaced by computers today. There is nuance, feeling.”
“We often look for companies that are not yet listed and with a long-term consistent story. We need to get a good feeling,” says Clode. “In the tech market, emerging companies are often heavily overrated. The trick is to remain cynical, ‘Apples’ don’t grow on trees.”
Although Clode said he wants to avoid the most mature companies and the most hyped ones, the largest positions in the portfolio are still Microsoft, Apple and Alphabet.
Overvaluations
Clode agrees that there is constant, and largely justified, debate about the valuations of tech stocks. “Especially now that the markets are breaking record after record, this is only logical. Overvaluation in certain parts of the tech sector is inevitable and so the trick is to find the companies with unexpected growth potential.”
“Google is valued at about 25 times earnings, the same goes for Microsoft. These are well-valued stocks. Companies like Google, Microsoft, Netflix and Amazon are seeing such rapid earnings and cash-flow growth that they are still expected to be trading at 30 or 40 times earnings in three years. Not for 300 times, as some analysts would have you believe.”
Emerging markets also offer great opportunities, according to Clode. In those markets, the opportunities are not so much in the companies that are already listed, but the companies that have yet to be listed in the coming years. “We meet those companies in ‘private land’ so that we can get to the bottom of them. We do this in Latin America and India, for example. The wall of capital that monetary easing and low interest rates have created in the stock market offers unprecedented opportunities there.”
Risks
Tech companies can be structurally challenged. Then a stock is not on the right side of the next big technology trend. In tech, it is not uncommon for a company to be dominant in an existing technology market for a long time, only to go bankrupt because of new technology.
“If you are a dominant player and you sell network equipment to S&P 500 companies, you have a problem if everyone suddenly moves to the cloud, as is happening now. Large companies like Amazon and Google often make the technology themselves, which means that even strong parties like Cisco drop out of the supply chain as intermediaries.”
On top of that, according to Clode, globalisation is slow to take hold. “We now suddenly find out that the entire economy runs on chips that are made on an island just off the coast of China. This now turns out not to be a good idea after all. A country like America now feels too exposed to the whims of the Chinese government. That chip production will be brought back to the US.”
“Innovation and development go hand in hand. In China, and in other parts of the world, you see all sorts of regulations emerging. You cannot leave current technological developments to market forces. The impact of those developments is too great.”