UP IN THE CLOUDS
Another area gaining momentum is cloud computing although it’s been a feature of the tech landscape for several years. Vohora expects it to accelerate, accounting for a significant portion of computing workload and eventually replacing more traditional forms of technology.
“Microsoft is a good example where the business has pivoted its revenue model towards subscriptions and is positioning as one of the best providers for public cloud services, specifically for large enterprises,” she adds. “The recurring revenue stream enables greater visibility and more sustainable earnings growth, supporting the company’s valuation today. Its cloud computing platform mAzure is arguably the free option that is yet to be fully priced into the stock and will accelerate growth as the move to cloud services gains more momentum.”
As in the social media arena, size does matter and she believes that market leaders will tend to retain their hold because of the “network effect” which helps to sustain the mmarket position of the technology titans of today, because the more users that engage, the more powerful these companies become.
“Ultimately, the big get bigger,” she adds. “Once critical mass has been achieved, it is hard for rivals to lure users away from the market leaders. As the cash-flow and earnings of these companies grow, they can invest even more in high growth areas.”
The same is true of artificial intelligence (AI) which is also creating a lot of buzz. “AI will be part of all industries but it is likely to be the incumbents who will provide the technology,” Flood says. “For example, mGoogle has had a head start because it has been using AI in its search engine while Amazon has also been working in this area. The question is who can outspend these companies?”
Looking ahead, Piantedosi believes that investors should not forget that innovation and disruption is constantly creating new opportunities “For example, 3D printing has developed from an industry that helped produce widgets in a more cost-efficient manner mainly to the industrial economy, but now the technology is evolving and expanding where you can now use 3D printers to build houses, cars and even for printing human like skin for burn victims and others who may need it.
These areas of growth are still in nascent stages, and business models have yet to develop, but over time this type of technological evolution can have a major impact on areas that are much broader than once believed.”
One of the challenges when assessing some of the newer technologies, such as AI, is to separate the hype from the reality, according to Nick Hartley, co-head of active equities at Legal & General Investment Management.
“It is important to determine what is already priced into shares as well as to have an appropriate grasp of how long it could take to materialise,” Hartley adds. “At the moment people are dropping AI into everything because it sounds better, but it could take a 10 and not a two-year time horizon before it affects companies’ earnings, even those that are at the forefront.”
