Is tech investment dead?
The world of investment loves nothing more than to declare that something is dead. Print media has been declared dead several times; live television is apparently dead; millennials have supposedly killed everything from restaurants to diamonds.
One thing which never seems to come under scrutiny? Tech. An umbrella term for anything which uses computers or the internet, ‘tech’ is considered unkillable by many. After all, our lives are now so firmly entwined with technology that it is hard to see how it could die – but maybe that is the problem. Technology has conquered the world; where do you go from there?
The very fact that technology is now ubiquitous in our lives could be its death knell as an industry that investors should be looking at. Ubiquity implies no more room for growth, and, without growth, profits will start to fall. It is instructive that many so-called ‘technology’ companies are turning away from the research and development of new hardware and embracing a purely digital, service-based or data-gathering future.
If a product can be held in your hand, there are only so many of them that people can or will buy. That number might be enormous, but your sales will one day flatten out. If you are selling something intangible, the market is potentially limitless.
Apple is a perfect example of the principle in action right now. When the company issued a profit warning in early 2019 which wiped 10% off its share value, many settled on factors such as the USA-China trade war or larger macro-scale global growth worries as the explanation. However, it seems the cause may have been something more insidious for tech investors – we might be looking at a saturation point. 2018 was littered with speculation that the western world is saturated with hardware, especially at the premium end of the market. Flat sales figures for the iPhone tend to back this up.
More interesting is what moves Apple is making in order to offset the loss. Rather than disrupting the market as it did with the iPod and iPhone, relying on superior innovations to change everything again, Apple has instead decided to move into the realm of being a service rather than a hardware manufacturer. The company generated US$100bn of sales in 2018 from non-iPhone products and that is only the beginning. Annual growth of 19% in everything outside of iPhones points at what is to come.
Tim Cook, CEO of Apple, is on record as saying that he sees Apple’s greatest future contribution to human history being in the field of healthcare. The former tech company is building medical clinics and has hired a team of up to 50 doctors to work out how to use the monumental pile of healthcare data generated by its wearable products. Have you ever used an Apple Watch to record your heartbeat whilst exercising? Congratulations; you are contributing to what Apple believes is the future of healthcare.
Another example is the upcoming move to allow Verizon customers free access to Apple Music in perpetuity. This is the company using its assets to attract new users who will subscribe to their streaming service over that of rivals like Spotify. A technology company wouldn’t really care what services people used so long as they used them on Apple products. Now, all indications are that Apple wants users – and the precious data which comes with them – over unit sales of hardware. The future is data, and tech companies want as much as possible.
And it isn’t just Apple; other companies previously considered to be ‘tech’ investments are also not really in that sector anymore. Facebook is arguably the world’s predominant media organisation and is going to have to admit that in 2019; Netflix is no longer a simple streaming service, it is a content creator of the first order which poured US$18bn into new content in 2018; Google is basically an advertising firm with offshoots as varied as hot air balloon internet providers, life sciences, agriculture, robotics, smart home technology and – similar to Apple – healthcare and human ageing.
Even new products which look like hardware generally aren’t. Consider Amazon Alexa and Google Home; these items are not designed to be a hardware innovation. They are selling a lifestyle choice in order to gather data which they will then use to sell you other products more efficiently. They are an innovation in the field of data gathering.
The big downside for investors is that ‘tech’ companies have a lustre and trade at a huge margin over traditional competitors in their new fields simply because of that shiny California glow. For instance, why should Tesla trade so much higher than other car makers purely because it does electric vehicles? Everyone is doing them now, and most companies can build and ship them at higher rates. Both Netflix and Disney will be creating content and streaming it to a mass market by the end of 2019; why are Netflix shares so much higher, and why do they rise so much quicker?
For the first time in decades it feels as if the defining innovations of the future are not being born in the ‘tech’ sector. For investors after the next big disruptive technology it may be wise to consider investments in fields such as climate science, genetic research, aerospace, healthcare and e-commerce rather than the traditional hardware giants. When Google Maps came on the scene nobody could have predicted how Uber would put it to use – but that is precisely how tech investors must think going forwards.
The truth is that so-called ‘tech’ companies have outgrown the technology sector. They have also come to dominate and redefine the media industry and are now moving rapidly into other sectors. Silicon Valley is not ready to be condemned yet, but it is certainly going to change with the times. There is going to be an investor backlash at some point once the truth dawns on the market and the novelty of ‘technology’ wears off. Investors should consider leaving traditional tech portfolios behind in 2019 and look at where these companies are going in the future rather than where they have been in the past.
