Facebook and Amazon: intrusive, insatiable and invincible?

Social media site’s bounce-back from data row shows tech sector still soaring.

Facebook’s share price has risen an astonishing 35% in US dollar terms since its lows during the Cambridge Analytica data scandal in March – the latest sign of a hugely resilient tech sector.

From an investment perspective, this shows the importance of taking a long-term view and having conviction even during tricky patches, as we have in technology which remains one of our favoured investment themes.

The sector bounced back faster from February’s stock market sell-off than any other industry. It has also recovered from other negative news, such as President Donald Trump’s criticism of Amazon on Twitter, without breaking a sweat.

It is led by the big household names Facebook, Amazon, Netflix and Google, known as the FANGs, but we prefer a more diversified investment approach.

Technology is a key driver of economic growth in the US, making up around a quarter of the S&P 500 index, and plays an important role in the current health of the global economy.

Other recent, jaw-dropping stats include:

• Twitter’s share price shooting up over 90% so far this year
• Music app Spotify being valued at $26.5bn at its initial public offering on the New York Stock Exchange in April
• Tech firm Nvidia’s stock rising more than 60% in the last 12 months

Amazonaphobia

Technology’s immense power to transform how we live is reflected in markets. For example, in the US we have seen attractively valued, highly profitable, cash-generating companies suffer share price falls due to the fear that Amazon is going to enter their business and take market share.

This “Amazonaphobia” has hit not just retail but healthcare too. The company announced a joint healthcare venture alongside Berkshire Hathaway and JP Morgan in January which triggered share price declines in health insurers and pharmaceuticals.

We examine the effects of technology on healthcare in our Mid-Year Outlook – The New Frontier – published on coutts.com on 4th July. It also takes a broader look at innovation and change in our world and what it means for investors.

Bringing tech’s power to portfolios

We invest in four technology companies within our Global 30 portfolio of direct equity investments. Those companies produce chips, components, software and tools that support the industry. In line with our investment principles of value and quality, they are profitable, cash-generating companies dominant in their fields.

We also have indirect exposure to the technology sector through several third party funds.

Despite tech’s triumphant rise, there is never any room for complacency when it comes to investing. One risk to look out for is that tech is what we call “a crowded trade” – lots of investors are chasing the relevant stocks. This means that, if any correction comes, it will be exacerbated as a large number of investors sell off.

Another area it’s worth keeping an eye on is the reaction of governments and lawmakers to new regulatory challenges the industry creates. Google, Airbnb and Uber have all had cases which involved them having to change how they operate.

While tech’s success might bring back memories of the dot com bubble of the 90s, there are key differences to what we’re seeing today. For example, when it comes to valuations, while some stocks do look a little stretched today, they are nowhere near the levels we saw back then.

On the whole, with strong growth, good earnings and long-term trends around the increasing role of technology in our lives, this sector is likely to remain a preferred theme of ours as long as the fundamentals remain supportive.

Lilian Chovin – Investment Strategist – Coutts