Janus Henderson: Encouraging fundamentals

(Foto: Denny Fish, portfolio managers in the Denver-based Global Technology Team)

Bouts of elevated volatility in the technology sector in July caught the attention of many investors. Not surprisingly, this led to some hand-wringing concerning valuations, the narrowness of the sector and the sustainability of growth rates. We, on the other hand, view much of the recent market movement largely as noise. In fact, we would prefer to see greater volatility in the themes that, in our view, are dramatically reshaping the technology landscape over the medium to long term. Individual companies tied to secular growth themes stand to play out over years – not quarters.  We believe stocks often tend to be more volatile than their underlying businesses.

One of the dominant themes reshaping not only technology, but the sectors that rely upon it, is the transition to the cloud and mobility. Our view toward semiconductors is driven, in part, by the rapid growth in connecting devices to the internet, and thus, the cloud. A newer concept which excites us is artificial intelligence. Algorithmic machine learning will likely propel the technology sector as well as the productivity of the wide range of industries it serves. Underlying all of these drivers are data. The collection and analysis of data will not only provide novel solutions for existing industries, but also likely create entirely new businesses in the process.

It is not just segments of the economy being transformed by technological innovation, it is entire countries. Consumers and businesses alike in China are rapidly adapting a digital first attitude toward commerce and other interactions, skipping many rungs climbed by advanced economies during the twentieth and early part of the twenty-first centuries. Gaming is another technology segment benefiting from powerful tailwinds. Enhanced capabilities enabled by more powerful chips, mobility, and mixed reality, are revolutionising the way games are designed and experienced.

Given these continuing strong growth trends we are comfortable with valuations across much of the technology sector. Of course there are exceptions, but increased share prices are largely driven by improved outlooks for growth rather than price-to-earnings multiple expansion. In fact, we see acceleration in the quality of the fundamentals. This is an important difference between tech valuations in the late 1990s and today. At that time, stocks were priced on the “hope” of the internet. Today’s – in our view much more reasonable valuations are built on the reality of the internet rewriting a new digital operating system for the entire global economy.

In our view, with the sector’s prospects to grow revenues and create new markets, growth-oriented companies appear more favourable following the recent bout of technology sector volatility. As a result, we think higher growth names associated with key sectors will likely drive the tech economy for years to come.