sector cannot be avoided Claude van Cuyck Investors may be wary of the TMT (technology, media and telecoms) sector following Nasdaq volatility in the past six months, but it continues to be the fastest growing sector in the world and investors who ignore it will miss out. Sectors geared to the superhighway (TMT and electronics) will continue to show strong revenue and earnings growth in excess of most other industries this year. Given that both the local IT Index and Nasdaq have recently corrected, now may be a good time to buy, but investors should expect continued volatility.
What is the best route for investors to take advantage of TMT opportunities? Obviously investing directly in TMT stocks is more risky for investors than a diversified portfolio through a technology fund. But the overriding advice is to go for quality. Buy high quality stocks with proven track records that dominate their specific markets or which offer something unique, and avoid the riskier stocks. Internet stocks, in particular, are risky. While the upside may be vast, the downside could be fatal. Most Internet stocks are coming to the market with a good idea, and little else. Future revenue, rather than future profitability, has become the war cry. Unfortunately, investors are becoming more risk averse and impatient with the excessive losses from Internet e-tailers. A survey released in late February in the United Kingdom indicated that the 133 Internet companies that had gone public since 1995 would need to grow revenue by an average 80% for the next five years to justify their market ratings. To put this in perspective, Microsoft, with a virtual monopoly, has managed to achieve 53% a year.
Only a few large e-tailers will survive. One of my bets is on Amazon.com, which has 20-million customers. Only a few local Internet companies are likely to survive, given South Africa’s limited market potential in this area. M-Web will probably be one of these. Other companies with well- established brands and good management that are following an “e-strategy”, such as Johnnic’s e-ventures, have significant potential.
Most technology funds have a fair amount of international exposure, given the limited technology universe in South Africa. In fact, there is a total lack of quality locally, apart from Didata and a few other focused IT companies. And we have seen a large part of the re-ratings in the local market already. To be quality stocks, local TMT companies need to be focused on very specific areas in which they are market leaders. Some examples are Ixchange (customer relationship management), Softline (accounting software) and MGX (storage space).
Some specific international stocks with strong growth potential are semi-conductor stocks such as Intel and Xilinx Inc. They will do well as a result of continued strong PC growth of 20% and surging mobile and wireless telephony growth. Forecasts are for 1,5-billion mobile phones worldwide in four years’ time. Demand for wireless devices and wireless applications will surge and stocks related to infrastructure (Ericsson), devices (Nokia) and cellular network operators (Vodafone) will benefit. Cisco Systems is well positioned in terms of convergence of voice and data. Optical fibre stocks such as JDS Uniphase will benefit from high demand for bandwidth. Worldwide technology funds are also an opportunity to gain international exposure, as most local international funds are closed to investors. The traditional way of valuing companies does not necessarily suffice when valuing technology companies. Basically, investing in the superhighway involves “momentum” investing, on the basis of future expected growth, as well as identifying the correct trends and picking those stocks that will dominate their market space due to innovative products, solutions and services.
Claude van Cuyck is the Gryphon Asset Management technology specialist managing the Brait Superhighway Fund