24th April 2014
Apple is now attractively valued says Walter Price, manager of the RCM Technology Trust. In a note issued this week, he says: “We were certainly impressed with the iPhone sales figures. It seems much of the surprise came from better-than-expected sales of the 5C and older iPhone versions. The shareholder-friendly actions also added to early investor enthusiasm.
“We think Apple is an attractively valued, steady-grower with great opportunities for capital return. The stock should work heading into what should be a more material iPhone upgrade cycle in the back-half of the year.”
Meanwhile Facebook is set to benefit from mobile phone advertising says the manager.
Price says: “We found Facebook’s results extremely encouraging and validating for our long-term investment thesis of continued growth in mobile advertising. Facebook’s solution seems to be taking share from both online and traditional media forms.
“The recent spending spree was a bit of a concern, but we think these results should put many of the concerns regarding these latest purchases to rest. That said, we like that the company is looking forward and taking a long-term view on where they’ll be able to reach consumers, and making these acquisitions when they’re in a position of strength rather than on their back foot.
“We think the company is attractively valued given the strong growth we’re seeing in existing segments and even more so after you factor in the additional opportunities from Instagram, video ads, and the Facebook ad network.”
Price believes this is not a repeat of the TMT bubble, though his trust is avoiding some IPOs and selling out of some stocks with a high valuation.
He says: “The fears of a second bubble in technology had been mounting: there were once again hints of exuberance on the part of investors after the NASDAQ hit highs not seen since the giddy days of 2000, and the IPO market for technology companies attracted headline-grabbing debuts from, among others, Twitter and the interactive entertainment for mobile company, King Digital. The market appeared ripe for a reality check and this is what we’ve seen since the beginning of March.
“Some high profile stocks were sold off, and in some cases this sell-off was dramatic. Investors have been quick to extrapolate this sell-off to a long-term change in sentiment towards the high-growth companies in the technology sector, but having lived through the last technology bubble, we believe there are some important differences. For example, companies are showing good progress against tangible metrics. There are some where valuations look high, but they may still be growing sales at 50% to 100% per year.
“Where there are very high valuations – 10x sales or higher – it is generally matched by an exceptionally high growth rate. That said, there are a number of IPOs in which the Trust has not participated because it believes valuations allow little room for strong returns to investors. There are those IPOs where companies have demonstrated high growth in the past, but need to make some kind of transition in their business model to shore up future profitability – Twitter or King fall into this category.
The note adds: “Then there are those that are good, high growth companies, but where the valuations are simply too high, in our view. We have reassessed some of the holdings in our portfolios in line with a more risk-averse environment. In response, we have moved out of some positions in higher multiple companies where valuations looked over-extended; these have performed well in a climate of buoyant sentiment towards technology names but are likely to face challenges in the current environment of greater caution.”
“However, it should be said that there are parts of the technology sector that have been largely untouched by the recent weakness, notably the large technology companies, which remain on low valuations. We have increased our portfolio exposure to this area, but still maintain our conviction in the core, secular growth areas of technology.”