The approach I prefer is to focus on more mature businesses – this requires me to care little how much these stocks have risen before I invest. The market has already sorted out the strong from the weak and I should expect the shares of the strong to have performed well ahead of my investing.
Looking at Technology investing over the last twenty-five years one is struck how the very large companies have tended to continue to capture value from new developments and how few smaller players have joined the elite. In software, Microsoft and Adobe prosper, online Amazon and Google still dominate.
The barriers to entry that these companies have created appear to give their shares ample cash flow backing.
Managing valuations
You can still invest in technology through the leaders without taking much valuation risk or risk their technology is overtaken – the risk of monopoly legislation seems the greater unknown. It therefore does not seem necessary to seek out lesser known second line stocks, you can just invest in the majors.
Hardware is a more competitive area than software or digital services. Intel and AMD lost their leadership in processors to Nvidia some decade ago and the latter has led in every processor hungry application since: gaming, bitcoin and now AI chips. Maybe they will catch up, but that’s quite a gamble. Similarly, decades ago Nokia, Ericsson and Motorola were the world’s leading phone companies, not Apple – that led to quite a difference in share price performance.
Meanwhile in semiconductor area, AI capital spending by the major online companies is immense. It fills the existing fabs, supporting the TSMC share price, and more fabs are being built which supports Tokyo Electron, Applied Materials and LAM Research. These shares have modest price-earnings ratios, but they are cyclical (after the fab boom ends) so they are trading holdings.
As these fabs come into use, they will demand more silicon (Shin Etzu Chemical) and more photoresist masks (Toppan). As a multiplicity of new chips are produced, they will need to be designed (Synopsys, Cadence) and tested (Advantest).
Investors could also consider opting for a fund that keeps an eye on these developments for you. Neither of the UK’s main technology investors seem to have captured the run in Nvidia in a significant way, but Polar Capital Technology now has a fair exposure to the better areas, while Scottish Mortgage seems to have more risk capital in China than in these technology areas.
The current technology boom benefits many companies. Those listed in the technology sector have generally performed well, though there are still many on acceptable cash flow multiples. The stocks mentioned above tend to be on high price-earnings ratios that can only be justified by the growth coming through – so far it has. Any investor can select stocks according to their tolerance of higher valuations. When I find valuations full, I tend to buy smaller positions in a broader range of the stocks with the best potential.
