Don’t let Facebook’s woes put you off technology stocks
A professional investor tells us where he’d put his money. This week: David Older of Carmignac selects three technology stocks with solid growth prospects.
After the tumble in Facebook's share price, has the technology sector lost its shine? While the dramatic headlines provided a sanguine reminder of the risks associated with a tightening regulatory environment, investors should not lose sight of the fact that disruptive technologies and trends are a key factor for achieving long-term performance. Even if investors have lost their appetite for Facebook, there are still plenty of other tech investment opportunities that offer excellent prospects for growth.
Leading a $55bn market
The ability to gather, analyse and utilise large volumes of data is undeniably a driving growth theme across a number of different industries. An example of this is the enterprise software sector, which is enjoying strong demand from companies seeking to modernise their IT infrastructure to utilise the potential of data analytics. The switch from software licensing to a subscription-based model is also improving the financial profile of software companies over time.
Splunk (Nasdaq: SPLK) is a clear market leader in IT operations analytics, and is attacking a total addressable market worth around $55bn. As well as being a strong player in the security-information and event-management market, the company is also starting to expand into business analytics, which opens up other avenues of growth.
Growth in video gaming
At the more light-hearted end of the software spectrum, investors would be well advised not to overlook the potential of video gaming. As of 2017, the gaming industry is valued at some €100bn and is growing at a rate of 9% per year, far outstripping other entertainment industries such as film and music. The average age of US video gamers is 35, showing that the appeal of gaming as entertainment is wider than you might have thought.
Similarly to enterprise software, video gaming is also seeing a transformation in its revenue model. What used to be a cyclical industry reliant on revenues generated from the initial release of a game now employs in-game purchases and add-ons, creating "microtransactions" that can distribute income across several years. Moreover, a growing demand for live streaming of video-game competitions exemplifies how game publishers are finding additional ways of boosting engagement with users and generating revenue more steadily than before. Activision Blizzard (Nasdaq: ATVI) is one company we see benefiting from rising margins and less cyclicality in this industry.
Having identifieda successful technology trend in one country, it is also apt to consider in which other regions it could be profitably applied. This brings the advantage of having a "proof of concept" to support a new business model, along with the opportunity to access a potentially vast, untapped market. A good example of this is MercadoLibre (Nasdaq: MELI), a rising giant of e-commerce in Latin America. The company is currently developing its payment business to address a highly underpenetrated segment in the region, following the same successful pattern used by PayPal and eBay a few years ago.