Tekne Capital Management portfolio manager Beeneet Kothari says US technology stocks continue to look attractive given their strong earnings outlook and dominant positioning in what he sees as a multi-decade reshaping of economies and business fuelled by COVID-19.
Tekne Capital's Beeneet Kothari says "you can bet on China tech" because of Beijing's policy support. Eamon Gallagher
Mega-cap US tech stocks have retreated as investors cash in on the Nasdaq's 75 per cent rally from its March lows to September highs, but Mr Kothari says the rapid embrace of technology and the move to online seen during the pandemic is a taste of a much longer-term transformation.
"You've got to fundamentally believe that technology is a force of economic nature," he says.
"You're in the middle of a 60, 70, 80-year transformation in how businesses are run, how governments are run, how consumers communicate with each other, how consumers communicate with businesses."
Mr Kothari, who will present at Friday's Sohn Hearts & Minds conference, has good form in picking tech trends: his tip at last year's conference of China data centre operator GDS Holdings is up more than 90 per cent. His 2018 pick of Brazilian payments group PagSeguro ranked in the top five performers.
US tech behemoths have fallen this week but the hedge fund manager says the stocks still look attractive on valuations given their solid financials and exposure to multiple fast-growing industries.
"You take the five big tech companies – Google, Facebook, Microsoft, Amazon and Apple – and they are between, depending on the company, 20 to 30 times earnings.
"They're certainly not five or 10 times earnings like a beat-up energy or coal miner company, but nor should they be.
'Long runway ahead'
"They grow, they're exceedingly profitable, they've got wonderfully cash-rich balance sheets. They've got growth inside of them. They don't at all seem offensively priced.
"And then you put that in the context of the fact that penetration levels are between 15 to 25 per cent. So there's a long runway ahead."
While he acknowledged "pockets" of overvaluation within the broader technology universe, he argued tech stocks were a "no brainer" in an environment where many investments offered zero yields.
The prospect of stricter regulation has loomed over the big US tech stocks amid the closely fought US presidential election.
But Mr Kothari said he was "quite sceptical" regarding concerns about more onerous rules or the prospect these companies may have to spin off businesses to appease regulators.
He said that it was the rapid embrace of the technologies owned by these companies that enabled many businesses to keep operating and staff to keep working during the lockdowns, and they thus played an important role in supporting economic growth during the crisis.
If China becomes number one, it will be because of technology.
— Beeneet Kothari, Tekne Capital Management
"I think the economic crisis makes any regulation difficult to pass. I think the fact that technology was a saviour makes it difficult to go after these companies."
He said policymakers also realised that tech companies, such as Amazon, were generally perceived positively by consumers as they delivered lower-priced goods.
The American election also spotlighted the growing technology rivalry between the US and China.
Moves by the White House to restrict China's access to certain technologies prompted Beijing to accelerate technological development in its next five-year plan.
"If China becomes number one, it will be because of technology," Mr Kothari said. "I think with China, you can bet on China tech. China wants their technology ecosystem to be a bigger force in five or 10 years from now."
Mr Kothari also watches the Australian technology sector and highlighted the ability of Atlassian, Xero and Afterpay to take their strength in the Australian and New Zealand markets and translate that into success at a global scale.
Commenting on Afterpay, he said: "The execution of that management team and the power of that brand have both been underestimated by myself and evidently by everyone because the stock is up ten-fold."
However, he said more could be done to help develop Australia's technology industries.
"You get these pockets of winners like Afterpay and Atlassian but they don't seem to germinate five, 10, 15 new companies. They don't seem to create ecosystems.
"I always think there's more policymakers could be doing. You don't have the breadth of businesses that you do in some of these other regions."
This article was originally posted on The Australian Financial Review here.
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