With global technology stocks enjoying strong returns, the big question is whether another tech bubble is brewing? While some market analysts say ‘yes’, GERRIT SMIT, Head of Equity Management at Stonehage Fleming, has a different view.
“The returns being produced in the technology sector are based on real organic growth that is occurring right now; not on the prospect of future growth, which was the case during the dot.com bubble of 1997 to 2001.”
Smit says that many of the major technology businesses are creating significant free cash flow currently, which is funnelled to shareholders through successful reinvestment or through dividends. “This is an important cornerstone of prudent, successful investing. Without free cash flow, shareholders have more uncertainty of future returns.”
During the dot.com bubble the free cash flow yield on the S&P 500 technology sector was less than 2%. Currently that figure is 4.9%, a ratio of more than double. Furthermore, the 12 month forward P/E multiple in the dot.com bubble era was around 40, whereas now it is 19. “In both instances the valuations are half as expensive now as they were then.”
In addition to strong free cash flow, Smit sees strong, sustainable, organic growth potential in many technology stocks, notably large-cap counters. This is the second reason that Stonehage Fleming’s Global Best Ideas Equity Fund, which Smit manages, is nearly 30% invested in major cash generating technology companies.
In the current technology world, the focus is on big data and getting information as fast as possible to as many as possible all over the world through smart mobile devices. While Apple recently launched its new smartphone with a price tag of US$999, both India and China are producing models with comparable technology priced around US$100. This is making mobile technology and its many benefits accessible to more individuals than ever before, creating a sustainable growth path for well-managed companies that distribute their products through mobile technology.
In the technology sector the clear way to monitor whether a company remains to be relevant is to follow its organic revenue growth. If this doesn’t come through consistently, it implies that their technology is falling out of favour and the business may be in process of becoming extinct.
In terms of individual technology stocks, the fund has positions in, Visa, Tencent, Alphabet, Accenture and PayPal. “Tencent is one of the world’s most successful technology companies,” Smit says.
Using the metric of organic growth as a benchmark, Tencent reported in their last earnings announcement that their revenue line grew by over 50%. In addition, their compounded free cash flow growth over the past four years was over 33% per annum.
Smit says Tencent’s strength lies in having a number of different earnings drivers. Its social network business WeChat alone has over 900 million active users. Both a social media and messaging app, WeChat is also used for mobile e-commerce, payments, ordering food, taxis and more. Furthermore, Tencent has a stake in JD.com, China’s version of Amazon, and in Didi, the country’s version of Uber. “Importantly, we are also comfortable with Tencent’s overall corporate governance,” Smit says.
Turning to Visa, Smit says this technology giant supplies the platform on which all Visa transactions globally occur. Its growth potential is based on the fact that payments, whether consumer, corporate or institutional, occur more and more online. The mushrooming of e-commerce is adding further fuel to the company’s growth potential.
Alphabet is another outstanding business, Smit says. As the holding company of Google, Android and YouTube, it is also very active in AI, driverless cars and satellite communications; Alphabet’s free cash flow growth has exceeded 17% per annum over the last four years.
Recently, assets under management (AUM) in the Stonehage Fleming Global Best Ideas Equity Fund passed the US$650 million mark. The fund, which attracts investments from private, professional and institutional investors has returned 47.2%* over the last four years, compared to MSCI World All Countries Index of 39.0%.
Smit runs this concentrated, high conviction portfolio of 24 stocks that are chosen for their sustainable growth potential, strong management, strategic competitive edge and attractive valuation. The portfolio has very low turnover: over the past 12 months Gerrit has only sold two positions and initiated one.
In addition to the high weighting in technology stocks, other investments include some of the world’s best known companies such as Nestle, Estée Lauder and PepsiCo where there is confidence in the sustainability for indefinite growth rather than volatile cyclical growth.
Cisco gives pre-owned tech a Refresh
In a market of constant upgrades, Cisco Refresh aims to keep quality product away from landfills, writes BRYAN TURNER.
When one gets a new smartphone upgrade, the old device may be used as a backup or can be used by someone else. In business environments, equipment upgrades may not be conducive to keeping old equipment around, which may send older, working equipment to landfills.
This is where Cisco’s Refresh initiative comes in. At Cisco Connect in Sun City this week, Ehrika Gladden, VP and general manager of Cisco Refresh, lifted the lid on a little-known aspect of the company’s strategy.
“Refresh is Cisco’s global pre-owned equipment business unit,” said Gladden. “It is certified to meet the quality and engineering standards of Cisco. It is licensed for software and it’s also inclusive of a services warranty.
“Our responsibility in 80 countries around the world is tied to both the recovery of assets and the ability to leverage those assets at a lower price point. This ensures our sustainability and proper usage of the Earth’s resources while providing access to small and medium businesses. The products are typically in the range of 20-40% cheaper. The products represent the entire portfolio for Cisco in some part, the majority of that product set is 2+ years in terms of generation.”
Cisco’s Circular Economy initiative ensures a sustainable loop through businesses willing to pay a premium for the latest, cutting-edge solutions, while Cisco markets older, working equipment for resale to those who don’t require the latest solutions. This ensures far less new components need to be used in a product range.
“We are leveraging the model of remanufacturing, refurbishing, recycling, and reusing,” said Gladden. “Depending on the product set, there is a certain set of product yield that we expect. They vary from product to product, but we do have a percentage that doesn’t make it through.
“Those are always reused, meaning we will look at those products and decide to use them completely differently, leveraging the components, remanufacturing back into the overall build process. If that can’t be done, we will go into a recycle process where we melt those products down to reuse them.”
Repairing and refurbishing older products isn’t just that. Cisco is creating repair centres that are owned by third-parties to uplift local ownership.
“The repair centres, as a global manufacturer, is Cisco’s entree into local ownership,” said Gladden. “I want to be precise about what I mean by local ownership. It’s critical for us to have a localised presence, but doing that through ownership. When you look at inclusive economies, those that are participative, to be sustainable – not in the product set, but generationally.
“The ability as a global manufacturer through a local ownership model isto create a repair centre where a product can be returned, screened, tested, and repaired, leveraging the talent that the Networking Academy is creating.”
Cisco is working closely with local governments to understand where it operates and how to leverage the skills in the market.
Gladden said: “We are also super excited about the National Development Plan and African Union statements which with we align: eradication of poverty, job creation, ownership, healthcare, education, it all fits in the model. So we were very excited to have the opportunity to come to Africa first to announce this. Over the next twelve months, we want to establish our first repair centres, and in the next 3 to 5 years, build that vision into a reality.”
Why Data Privacy has become a Pipe Dream
If you’re active on WhatsApp, Facebook or any other social platform, you’re not as safe as you thought, writes
AARON THORNTON, MD of Dial a Nerd
As you begin to read this, let’s perform a quick experiment! How many active conversations are you engaged in – right now – on WhatsApp? When was the last time you shared a picture or video on Instagram? Is Facebook currently open and active on one of your devices? And how many internet- connected devices are you using at this moment? Chances are, you have multiple devices running multiple applications most of the time. So what’s the problem, you ask? Since when did checking in with a high school buddy in Australia via Facebook become a dangerous act?
In reply, we say, read on if you can stomach it!
Nation-State Hacking & You
It might seem like a laughably long shot to say that you are a key player in the increasingly sinister and sophisticated world of nation-state hacking. Well, you are. Given that individuals, businesses and governments are now constantly connected, round the clock, consumers and businesses have become fair game in cyber espionage. And as we create and share more and more data, both the value and accessibility of that data increases. According to a report by McAfee, IP theft now accounts for more than 25% of the estimated $600 billion cost of cybercrime to the world economy.
With data having become the ‘new gold’, nation states are naturally pouring investment and key resources into building advanced cyber warfare tools. Indeed, entire divisions of armed forces as well as the upper echelons of corporate leadership are devising ways to harness data to gain economic, political and social power. At the highest level, tools and platforms are being developed with the specific aim of perpetrating cyber espionage and data theft. No surprise then, that the consumer and business environments are rife with increasingly advanced malware, ransomware and many other malicious hacking tools and methods.
Still not convinced? Yes, we can smell the scepticism from here! So let’s take a moment to see how this has already played out, beneath our noses.
Remember the Facebook–Cambridge Analytica data scandal of early 2018? For many, this was a watershed moment in the emerging war for consumer data – and the ensuing tensions between privacy, power and profit. Need a refresh? Well, in 2018, Facebook exposed data on up to 87 million Facebook users to a researcher who worked at Cambridge Analytica, which worked for the Trump campaign. In essence, the data was harvested without user consent and used for political purposes.
Another chilling but less direct example can be found in Russia’s meddling in the 2016 U.S. elections. According to Politico, Russia launched a massive social media campaign to ‘sow discord’ leading up to the elections. The website reported that as early as 2014, an infamous Russian “troll farm” known as the Internet Research Agency – a company linked to Russian president Putin – developed a strategy using fraudulent bank accounts and other fake identity documents to “spread distrust towards the candidates and the political system in general.”
When referring to the Russian hacks and their impact on election results, one U.S. Representative sagely noted: “They didn’t just steal data; they weaponized it.”
Ignorance is not bliss
Okay, so data is being ‘weaponized’, and ordinary people and businesses are being caught in the crosshairs of cyber warfare. A little bit frightening, but the good news is that savvy individuals like you can take steps to protect personal data and actively combat the creeping influence of juggernauts such as Facebook and Google.
Now that we’ve left you sufficiently spooked, you can get back to those demanding WhatsApp/Facebook/Instagram notifications (same company, by the way)…albeit, we hope, with a slightly altered [cyber] worldview!