Fangs with further to go

The big tech giants have enjoyed a strong year, says professional investor Walter Price. And they're not done yet.

Each week, aprofessional investor tells us where he'd put his money.This week: Walter Price, Allianz Technology Trust.

There has been a lot of caution recently surrounding the US technology market, specifically the big names in the sector. The technology sector has certainly moved higher in 2017. The share prices of Amazon, Apple and Facebook have risen by 35%, 51% and 32% respectively (in the year to 30 June). At face value, some valuations now look ambitious Amazon trades on 184 times earnings, for example. So it is understandable that investors are wary.

However, we would argue that these valuations are fully supported by equally audacious growth in earnings. These are high-growth companies in a low-growth world, and as such they are rightly prized. If companies are valued at 20-30 times earnings with low growth, it would be more of an issue. So why should you continue to invest in these giants? We believe that they have more to give.

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Television streaming service Netflix (Nasdaq: NFLX), aside from still having a strong growth story, has built a moat around a hugely powerful global brand. The barriers to entry for competitors are high and it offers its subscribers something they genuinely want. It is also producing its own content and giving its creative workers free rein and licence to make products they believe in. This will set it apart from rivals following the traditional Hollywood model. With a rising subscriber base, a clear understanding of what users want (due to its strong focus on data analysis), and a strengthening reputation for "home-grown" content, Netflix is an attractive investment with the fundamentals to back up the price.

Amazon (Nasdaq: AMZN) is another Fang that has been in the press a great deal this year due to its expansion into the food and drink sector. It has, in effect, issued a warning to other industries: "Get your act together, or we will do it for you". One of Amazon's less well-known successes is its management of legacy products and services, a challenge facing many companies. Amazon has done this in part by promoting Amazon Web Services new integrated development environment (IDE), which allows for browser-based writing, running, and debugging of code in more than 40 different programming languages. This means that programmers can work together more easily on projects and can do it all on Amazon's cloud-based servers. It may seem small, but winning the hearts and minds of the next generation of developers will have a massive impact on their digital offering.

Finally, demand for the new iPhone X smartphone from Apple (Nasdaq: AAPL) is yet to be confirmed, but appears to be higher than it was for the iPhone 8. Apple taught consumers how good a product should be, and demand for that quality seems set to continue alongside its other services, such as mapping and music. Although we are not a believer in a megacycle of demand in 2018, we do believe that users will upgrade to the X and the XI over the next few years, and as a result the stock will continue to move higher as earnings increase.

Walter Price is the managing director and portfolio manager of the Allianz RCM Technology Fund since 1974, based in San Francisco, California. Walter graduated from Massachusetts Institute of Technology. He shares his expertise on MoneyWeek’s share tips.