Elements of this image from NASA. Previous image: Donald Giannatti / Unsplash.
It disrupts new industries and moves into different parts of our lives. Technology is present in the way we drive, the way we shop, in our workplaces, in our homes. It helps us communicate effectively and manage our lives more efficiently. The companies that create that technology are in a powerful position to grow even in stagnant economic conditions. Technology is embedding itself into new industries: twenty years ago, car companies relied on mechanics to stay competitive. Today, they rely on their technology departments. The greatest innovation in the motor industry is coming from technology companies such as Google, rather than VW or Ford. As we look to the future, the key determinant of the success or otherwise of a motor company is likely to be the extent to which it can harness technology to build safer, comfortable and more energy efficient cars.
We see a similar phenomenon in payment systems. Cash is increasingly obsolete, while mobile apps and digital currencies are likely to overtake credit and debit cards as the most popular e-commerce payment methods worldwide. Nimble fintechs are challenging the existing banking networks, which are encumbered by legacy systems and, too often, surprised by the speed with which people are willing to switch.
This pattern is replicated across multiple industries. No sector is immune – those that believe their business is untouchable are likely to experience the most dramatic change when it arrives. Companies must embrace technology and innovate, or face extinction. In the process, the addressable market for technology companies grows.
However, technology is not only about taking staid old industries and ‘disrupting’ them, technology also has an important role in allowing businesses to be more efficient. This is at the heart of corporate digital transformation. Those businesses that are not embracing a digital strategy find themselves marginalised and uncompetitive. Companies that rethink their existing business models and processes through the use of technology are becoming more efficient.
Increasingly, companies see the potential in artificial intelligence. In a healthcare company, it may be the reading of scans, or the administration of drugs. For insurance companies, it may be in the interpretation of claims. The data sets used to power Artificial Intelligence (AI) would not be accessible if it was not for the cloud. Also, the cloud enables businesses to build sufficient scale to cope with the demands of data-intensive services. This is driving wider adoption of cloud-based systems.
It is also saving companies money: moving to software as a service and cloud computing lets companies circumvent a costly upgrade cycle. Rather than having to support expensive in-house technology capability, they can pick and mix their technology requirements to suit their business requirements. They can move data storage to the cloud and buy their software on a subscription basis.
These trends have helped make technology a successful investment over the long term. That said, just because technology is pervasive and high growth, it does not guarantee good returns. This was particularly evident in 2022 when rising interest rates led to a devaluing of some technology stocks irrespective of revenue growth.
Technology investment forces an investor to look to the future. This is the direct opposite of investing in a benchmark that rewards yesterday’s winning companies. Technology investment demands that investors uncover the trends of the future, looking to see where industries are going, and who is likely to win or lose from those developments. In this way, it forces investors to keep pace with changing markets. At each stage, therefore, the technology investor should be aligned with the winners from change, rather than those at the wrong end of it. We continue to see new industries being created, while old industries die or are forever altered and technology sits at the heart of this global innovation.
It is also worth noting that technology is far less cyclical today than it has ever been. The days of the upgrade cycle, where companies replaced expensive technology equipment when they were flush with cash, have largely disappeared. Enterprise software allows companies to avoid these capex-heavy cycles, paying for what they need when they need it.
As it stands, technology incorporates a vast range of different options. There are the traditional technology companies – fast-growing, disruptive companies such as Amazon or Square, where revenue growth might be 50% per year. However, the sector has alternative options: Microsoft and Apple, for example, could be considered more stable, annuity-like options. Less highly-valued, they pay growing dividends and deliver steady earnings. There are turnaround ideas, or special situations. This means it is possible to build a portfolio that can perform in a range of market environments. The diversity of technology companies is often over-looked.
The growth of technology has been seen in its increasing dominance of stock market indices. As technology’s influence grows, we see it forming a greater part of stock market indices as it pervades more and more industries.
Most investors have long-term goals for their savings: they may be saving for retirement, or for their children’s university fees. It makes sense, therefore, to future-proof an investment portfolio by aligning it with enduring structural trends. An investment in technology helps keep a portfolio focused firmly on the future.
Source: Thomson DataStream, total return % in GBP, to 31 December 2022.
Source: MSCI World Index as at 31 December 2022. The weightings for each sector of the index are rounded to the nearest tenth of a percent; therefore, the aggregate weights for the index may not equal 100%.
