Established brands such as Microsoft, Apple, Amazon and Alphabet have become staples of many investor portfolios.
“Technology stocks have been the stand out winners from the last decade and the big tech titans now command enormous competitive advantages over any potential rivals,” says Laith Khalaf, head of investment analysis, AJ Bell.
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“They are also deeply entrenched in everyday life which is a very different landscape to the tech boom and bust of the late 90s.”
“Technology investors will point to growth prospects of tech stocks as justification for their lofty valuations, but those who believe in mean reversion will no doubt wince when they look at long run valuation measures,” adds Khalaf.
“This is compounded by the fact that investors can now get a 5% risk-free return on their money from cash or bonds, compared to less than 1% just a couple of years ago.
Before diving into tech stocks, investors should double-check what their existing exposure is, adds Khalaf.
"If invested in global or US funds, it’s likely they already have a sizeable slug of tech in their portfolio, and adding some more simply increases the bet on a sector that comes with a premium price tag," he says.
While many fund managers and analysts will back major players such as Apple, Alphabet, Meta, Microsoft and Nvidia, we asked experts for their views on some of the lesser-known and undervalued top technology stocks.
Consulting firm Accenture (NYSE:ACN) serves a diverse client base with a significant emphasis on technology consulting.
While consulting contracts are typically short and clients can terminate contracts at short notice, Charles Stanley equity analyst James Ford believes its movement into AI will accelerate its growth.
Its share price is up around 23% this year and approximately 50% of its group revenue is derived from its cloud business, which demonstrated 27% year-over-year constant currency growth for the full year 2023.
“The company is well positioned to capture the extensive opportunities presented by the ongoing trend of businesses migrating onto cloud, driven by the cost benefits in doing so,” says Ford.
“Cloud growth has slowed recently due to cyclical factors such as an optimisation in customer IT spend, but structural drivers remain intact. AI represents a natural evolution of cloud computing, and the gradual adoption of AI is likely to reaccelerate growth.”
Ansys (NASDAQ:ANSS) provides physics-based simulation software tools to evaluate how products will perform under various environments to ensure quality and safety.
Its share price is up around 21% so far this year.
“Ansys enables resource savings, for example by allowing a material’s sustainability and recyclability to be factored earlier into product design and testing,” says Jon Wallace, fund manager of the Jupiter Green Investment Trust.
“Virtual design and testing using simulations allows engineers to consider assembly and disassembly during the design phase, which leads to easier recycling of valuable materials and removal of toxic materials when the product is no longer usable.”
“Apart from Nvidia, only one other company in the S&P 500 has performed better over the last six months since we first bought it, yet it is almost entirely ignored by specialist technology funds and Wall St analysts,” says Wheeler.
“Intel has new products for the hardware upgrade that is coming – how else are people going to run this AI then? – and is setting out its store to become the ‘Taiwan Semiconductor Manufacturing Company of America’ with huge subsidy backing from the government.
“My prediction is that by the time Intel announces it will make chips for Apple and Wall Street subsequently suggests it is a ‘buy’, the stock will be very much higher.”
Intuit (NASDAQ:INTU) is a US-based financial software business that is best known for its QuickBooks accounting software and TurboTax DIY tax preparation software.
It is expanding into payments, payroll and compliance for small businesses and is growing its consumer arm.
Mark Nelson, senior equity analyst at Killik & Co, also suggests that Intuit is well positioned to benefit from AI.
“It has a massive quantity of data: 500,000 customer and financial attributes per small business, 60,000 tax and financial attributes per consumer, and nearly 20 billion transactions imported from financial institutions annually,” he says.
“Importantly, this is data that only Intuit has. The recently unveiled Intuit Assist generative AI platform, now integrated across its various offerings, can harness this data, driving more frequent and meaningful customer engagements, and reducing churn while also providing another lever for growth.”
Intuit's shares are up around 40% already this year and it is trading on 33 times July 2024 earnings.
“We believe that if the company can execute on its exciting initiatives in generative AI, service-based offerings then there is potential for a high-teens growth rate, exceeding current market forecasts,” adds Nelson.
German multinational SAP (NYSE:SAP) provides business operations and customer relations software, which may not sound too exciting but its share price has grown 43% so far this year.
That has excited Tom O’Hara, portfolio manager of the Henderson European Focus Trust.
“The boring world of enterprise resource planning (ERP) software has gotten more interesting and, thankfully, SAP’s governance and capital allocation framework is much improved of late,” he says.
“What we now see is the prospect of double-digit compound earnings growth as SAP’s corporate clients move their systems from ‘on premise’ to the ‘cloud’.
“SAP has expedited the transition by announcing a 2027 cut-off date for on premise maintenance services.”
The company is also able to cross-sell services and O'Hara is also impressed by its appointment of Dominik Assam as chief financial officer from Airbus.
“He is cash flow focused and has a track record in delivering in large-scale organisations,” he adds.
Picking individual shares takes a lot of research and can cost a lot in trading fees depending on the investment platform you use.
It is important to build a diversified portfolio and if you don’t have the time or confidence to pick and monitor shares, it may be worth backing a fund instead that will do much of this work for you.
Kasim Zafar, chief investment officer for EQ Investors, highlights the Sanlam Global Artificial Intelligence fund.
“As a theme, we think we are still in the early innings of AI development and adoption,” says Zafar.
“For investors, finding companies that are able and willing to harness this technology to improve revenues or manage costs will lead those companies out-competing rivals. It is exactly this approach that is used by Chris Ford and his team running the Sanlam Global Artificial Intelligence fund, making it our top pick in the technology space.
Tom Hopkins, senior portfolio manager at BRI Wealth Management, also suggests using investment trusts to take advantage of competitive discounts to net asset value (NAV) whilst reducing stock specific risk in the technology sector.
“Technology has been a dominant stock market sector for much of the last decade, with artificial intelligence being the most recent theme driving most of the US equity returns in 2023,” he says.
“In an innovative growth sector like technology, investors much be wary of stock valuations and the stock specific risks that come with such a sector.
“We would suggest looking at the UK Investment trust sector to take advantage of the current discounts to NAV’s whilst gaining exposure to a portfolio of technology companies reducing the stock specific risk.”
He suggests the HG Capital Trust (HGT), which currently trades on a 21% discount to NAV but offers investors exposure to a portfolio of global private equity companies with a particular tilt towards European software and technology companies rather than having a US bias.
Alternatively Scottish mortgage investment trust (SMT) is trading on a 17% discount to NAV. The trust has a strong bias towards disruptive global technology companies. Around a third of the portfolio is linked to companies involved with artificial intelligence with chip designer Nvidia and chip equipment supplier ASML featuring in the top five of the trust’s portfolio.
Marc Shoffman is an award-winning freelance journalist specialising in business, personal finance and property. His work has appeared in print and online publications ranging from FT Business to The Times, Mail on Sunday and The i newspaper. He also co-presents the In For A Penny financial planning podcast.
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