T. Rowe Price Global Technology Equity fund manager Joshua Spencer answers a Q&A on opportunities ahead in the technology space.
Why invest in tech right now?
The ability for companies or sectors to show growth over the next decade is going to be difficult, if you accept as I do that macro-economic growth is likely to be modest. We are seeing this in Europe, the US, and even China has slowed down. There are limited prospects of this changing dramatically.
However, I believe tech is one area able to drive its own growth through innovation, new products and product cycles, and market share gains. In a low-growth world, this is where the growth is. Tech is an oasis of growth in a global economy that lacks it.
Bearing this worldview in mind, our fund has tilted toward the faster-growing companies within tech. These are internet companies like Amazon, Google and Tencent – as well as new areas of software, such as ServiceNow, Salesforce.com and Workday. We also have exposure to those companies transforming industries – Tesla, for example. We have shied away from the more mainstream hardware equipment companies.
How powerful is the Cloud movement?
The upstart group of companies operating the cloud – Salesforce.com, Workday and NetSuite – are attacking Oracle and SAP. Oracle and SAP, which have close to a $300bn combined market cap, certainly are the household names in this space and have huge revenue streams.
However, these behemoths are under assault from this new group of companies, which have a market cap close to one-fifth of the incumbents.
It is a time of enormous disruption. If you looked at the financials for Oracle and SAP over the last two years, there has been zero growth in new business. While these companies still have big streams of maintenance, they struggle to add any new customers. This is because implementing a solution from SAP and Oracle requires thousands of people working on giant projects, which is damaging to a company’s workflow.
The upstarts are successful because implementation can be done quickly – as it is all done over the cloud. These upstarts are likely to grow for years to come and could flip the market cap differential on its head.
Sometimes you have to pay attention to the obvious signs right in front of your face. To me, this is cloud computing. At the same time the PC was obvious, Microsoft went from being a tiny company to one with a $500bn market cap over a period of 10 to 15 years. I see the same opportunity in cloud computing.
What is your view on divisive IBM?
IBM just does not pass the test of being able to create value over a longer-term horizon. When you consider 70-80% of its business is threatened by the new model of cloud computing, it is difficult to find a reason to own the stock. It is structurally challenged.