The sudden craze for mobile game Pokémon Go has brought the spotlight back onto the potential for investors in technology. The game became the fastest-adopted in history following its release two weeks ago, and shares in co-owner Nintendo rose a massive 70 per cent. The share price has since been tempered with a 17 per cent fall, which is to be expected after such a rapid rise. But it remains that many people are excited about the potential of augmented reality technology, and how readily users were willing to adopt it for the right game.
This week, some of the big boys of the tech world – Apple, Amazon and Facebook – are releasing trading statements. The so-called “Fang” stocks, Facebook, Amazon, Netflix and Google, have had a cracking 18 months. Gains in their share prices ranged from 54 per cent for Facebook to 141 per cent for Amazon since the start of last year.
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They are often criticised as being overvalued or even in bubble territory. Shares in Amazon, for example, have risen 5,000 per cent since its lows of $10 after the dot-com bubble popped. Its price-earnings multiple is around 300 today, which is a huge figure compared to around 25 for the S&P 500. On this basis it can be difficult for investors to know whether they’re worth adding to a portfolio.
But it’s too simplistic to say they’re overvalued or draw comparisons with the tech bubble of the noughties, says David Coombs of Rathbones. “We are nowhere near that. These aren’t faddy companies that have popped up opportunistically,” he says.
Google, for example, has no clear competitor while its parent company Alphabet owns a wide range of experimental ventures, which means it can have a hand in lots of emerging ideas.
“Who knows what the next big technological innovation will be, but Amazon or Google will probably buy it,” says Ben Yearsley of Wealth Club. Indeed, Google had a hand in Pokémon Go’s development. Creator of the app game, Niantic, was spun out of Google last year and the search giant still owns an undisclosed stake in the company.
Unless they acquire emerging technology, it can also be very hard for mega-sized companies such as these to continue to grow. “I can give you a whole list of companies that grew so big their innovations weren’t enough to move the dial. Nokia and Dell are two of them,” says Coombs. For this reason, many investors are looking at younger tech with hopes of finding the next great social revolution. Currently creating a stir are the internet of things, specialised sensors, advanced power cells and robotics.
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All have supporters: “Machines replacing humans is a very interesting investment theme,” says Coombs, alongside cynics: “I’m very cautious that the innovation is less than people believe. We are at least 10 years away from robots playing a part in society,” says Markus Stadlmann of Lloyds Banking Group.
Biotech has been particularly feted. There has been an explosion of interest in firms on the cutting edge of medicine in niches such as stem cell therapy, immuno-oncology and therapeutic proteins. Share prices in a basket of companies on the Nasdaq Biotechnology index were up over 600 per cent at its peak last summer.
James Anderson, manager of the well-regarded Scottish Mortgage trust, describes DNA sequencing firm Illumina as “the company I think has the greatest possibility of changing the world and will make the greatest impact in 10 years’ time”.
But there’s also a lot of cynicism towards biotech. The industry encompasses a wide range of companies from the well-established to very early stage, which have product candidates still undergoing medical trials. Even if a firm does have regulator-approved products, many are expensive and yet to be widely adopted. Not everyone is convinced biotech will storm the world imminently. “There are fantastic discoveries but it is probably an area where discoveries create as many risks as benefits,” says Stadlmann.
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The trick is finding the companies that can actually revolutionise society. Illumina, with its hopes of detecting cancer through blood tests, is one that will, says Anderson. “The fact it is deeply out of favour with investors at the moment does not change that at all.”
One area of tech which is possibly closest to revolutionising society is electric vehicles, says Peter Fitzgerald of Aviva Investors. Their popularity has boomed. There were 80,000 on UK roads last year, compared to just 3,500 in 2013. “They are on the world’s streets and there will be even more next year than there are now. It could be an area that’s under-appreciated for growth and disruption of the auto industry.”
The most well-known electric car company is Tesla Motors. Chief executive Elon Musk last week laid out his vision of developing an electric lorry, a pick-up truck, a public bus and systems to integrate them on the roads. It’s the “Musk Master Plan” and analysts say Tesla would need to spend $3bn or more to bring it to fruition.
Given how specialised technology is and how hard it can be to sort the genuine winners from the soon-to-be losers, it’s probably better for investors to go through investment funds. “I wouldn’t try to pick individual stocks outside of the mega-cap companies,” says Coombs, adding he invests via the Allianz Technology trust and Polar Capital Technology trust.
Annabelle Williams is deputy money editor at City A.M.