The dramatic drop in US tech stocks is a healthy reset, argues Jonathan Curtis, who oversees the Franklin Technology Fund research team.
During the Covid-19 epidemic, people worked from home, and enterprises used technology and services. As the Covid-19 outbreak subsides and people return to work, they order less online, stream less content, and spend less time on social media. What’s the tech sector’s setback?
US tech stocks had a difficult year. The benchmark for tech equities, the NASDAQ Composite index, is down 30% this year. Twitter, Amazon, Facebook, and other internet companies are laying off tens of thousands.
Jonathan Curtis, Portfolio Manager of the Franklin Technology Fund and head of its research team, says things aren’t as bad as they look. Investors shouldn’t be too frightened by the slump in US technology stock prices, he adds, stressing that the technology sector re-set ongoing in the US and around the world is a constructive reset.
Identify companies whose business strategies can survive the pandemic, he argues. Curtis said the US tech industry is greater than FAANG and FAANG+ stocks.
Edited extracts from Moneycontrol’s Kayezad E. Adajania’s interview follow.
In the B2B market or enterprise business, we’re seeing good resiliency. Even though we’ve witnessed layoffs in B2B, they’ve been minor.
Resetting is healthy. No crisis here.
As a technology fund manager, how has stock selection altered since the Covid-19 outbreak?
Covid-19 excited the technology sector with work-from-home options. Some cybersecurity companies gained from more PCs, and PC manufacturers benefited from customers buying more PCs to work from home. Because we watched movies at home, broadband internet providers and Netflix benefited. Because we were home, scrolling Facebook, social media firms benefited. They’ve slowed.
But technology is bigger. After Covid-19 subsided, not all companies slowed down.
Before the crisis, businesses that were reluctant to embrace technology did so. They gained customer knowledge. In a changing world, they’re incorporating digital technologies into other sections of their business. Microsoft. The largest software company. The enterprise-buying center is a major customer. The company anticipates its enterprise division to expand 20% this year, according to its most recent earnings call. In a slowing macro environment. Microsoft predicts cloud growth.
Oracle, ServiceNow, SAP, and IBM are similar. These digital enterprises are resilient because their business strategies transcend beyond Covid-19. These companies have excellent recurring revenue business models to support their growth. B2B enterprises cater to other companies adapting to technology; their business model doesn’t depend on whether people work from home or in offices.
I like to think of them as enterprise basics, or enterprises that will always get paid.
As a technology fund manager, what new technologies interest you? These firms in India?
I like Cloud, AI, and ML. We’re producing human capital out of data, software, and semiconductors to make knowledge workers like us more productive.
I’d also mention work’s future. Videoconferencing and chat tools fared well at Covid. Many of us work from home, if not fully. Three days a week, our employers need us. But I’m home for two days. I still need to collaborate with coworkers, track work, and check items.
Cryptocurrency and underlying technology? Many computer experts suggest Blockchain or Ethereum, the underlying technology behind cryptocurrencies, may be applied in banking and finance.
Shysters have taken advantage of people and gotten them to part with their money, which infuriates me. I’m annoyed. Franklin Templeton doesn’t buy cryptocurrencies.
Our portfolio companies have benefited from the crypto topic, but they do other things, too.
TSMC (Taiwan Semiconductor Manufacturing Company), an Nvidia partner, has benefited from the crypto approach.
Blockchain technology and the features it enables – counterparties being able to interact trustlessly and have confidence that something has occurred or will occur — is a powerful new idea that adds ownership and the like to the internet.
Even Ethereum, which we don’t own, has a place in this universe.
Back in India, many investors saw FAANG (Facebook/Meta, Amazon, Apple, Netflix, and Google/Alphabet) and FAANG+ stocks as a reflection of the US IT sector. Is that right?
Tech investors often make this error. They think tech is Microsoft, Alibaba, Tencent, and Baidu. Some of these are ours. We’re underweight large-cap firms compared to our benchmark.
We own small and mid-cap tech companies. We know them better than others. These small and mid-cap companies have strong business models and long-term growth prospects.
We think there’s real alpha (outperformance over the general market). We have unfair access to Silicon Valley corporations because we’re there. Not only huge tech corporations, many of which are nearby, but also public and private tech startups.
We own Celonis. Germany-based private firm. It automates corporate workflows.
We like California-based Databricks. It’s into ML and AI. Its business is booming. Good economics.
Do you think investors should hold technology, sector, or thematic funds? How much should they have?
Everyone should invest in tech. These are top-notch companies with solid balance sheets.
Should you save? Consult your financial counselor before making this decision. Determine risk tolerance. 100% of your assets in technology is a bad strategy. 0% is also bad.
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