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Google, Facebook & Co had a bad start into the year. However, the environment for the IT sector has also been rather poor since October last year while May was one of the most negative months for the Nasdaq in quite some time. Up until the cut-off date (16.5.), the fund that has suffered the least from the current weakness in the sector is the DNB Fund Technology.
Unlike most of its competitors, the fund focuses most on the "valuation" factor and follows a value and contrarian style. High-valuation or high-growth stocks, which are popular in the market, were left out of the portfolio even during the boom phase. As early as 2019, the portfolio adopted a more conservative approach. There was only a minor focus on soaring technology stocks, as the portfolio managers considered the valuations too extreme. During the boom phase (2020 and 2021), when these highly valued stocks rose sharply, this decision had cost performance - but since the start of the correction, the tide has turned and the fund is performing significantly better again in its peer group. Since its introduction, the fund's performance has amounted to an annual return of 15.39% (as of 31.05.2022).
Two areas that the tech team is currently avoiding are the semiconductor industry and the hardware market. After the COVID period, in which consumers invested in new smartphones, phones, PCs, TVs, etc., they will now spend more money on travel, restaurants and entertainment, according to the portfolio management. The conclusion: there will be less money available for electronics. On the other hand, investments were made in the software sector and the more value-oriented part of the market (e.g. Microsoft, SAP or Oracle). Moreover, the management team currently considers the gaming sector to be interesting. The growth rate in the second half of the year could be even higher than anticipated.
What's next for the big players? Apple vs. Microsoft
Looking at Microsoft, the DNB team is optimistic going forward, as the company is very well positioned across almost all major IT trends. They expect growth of 16 to 20 per cent. The company has a very good recurring revenue model. In contrast, once again, we are very skeptical when it comes to Apple. The reason is that the electronics market, or the consumer market, could be quite difficult in the near future because there was too much investment in that during the pandemic period. So, if you take a closer look at Apple, it has almost the same price as Microsoft. However, the company is only growing at about 5 per cent annually in terms of revenue, while Microsoft is growing three to four times as fast. Nevertheless, it is trading at the same valuation multiple. Furthermore, risks can be identified for Apple when it comes to regulation of platform fees and also the saturation of the smartphone market. These are reasons why currently we have a large stake in Microsoft but none in Apple.
The team is basically neutral on Google and Facebook. The shares are very attractively valued, but it is a little unclear how the advertising market will develop over the next 12 months.
Strong growth within cloud computing
There is potential and strong growth in cloud computing. The market is already very large, yet it could be an early cycle. Microsoft alone grew by almost 50 percent in this area in the last quarter and expects similar figures for the next quarter. Amazon and Google are also well positioned in this field, so this market should grow at a high pace over a longer period of time. Especially since Amazon has always been able to score with good profitability so far.
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