Investing in technology stocks has been a great place to be invested over the last decade, especially more recently during Covid-19, writes Mark Devcich, Pie’s Chief Investment Officer.
Covid fast-tracked change
Covid accelerated a digital transformation that was under way prior, however technology has enabled a distributed work force to function efficiently and smoothly so it really has become business critical. Technology tools like Zoom or Microsoft Teams allowed us all to stay connected for both business and personal life during our lockdown last year. Many companies have continued flexible remote working options since then, and these digital changes have become a regular part of our lives. The growth and popularity of many of these technology stocks has provided some excellent investment opportunities at Pie.
What does Pie’s investment team look for?
When looking at technology stocks, just like any business, we want a product that adds value to their customer, that they love using. Secondly, we want a large addressable market as growing companies can provide advantages such as being able to afford more talented employees etc. Thirdly, we want A-grade management, preferably with skin in the game (invested in the company themselves) who we have confidence in creating a strong company culture. Our strategy is to identify market leaders and companies that are growing, or will grow, in the future.
How we are investing
Pie’s investment team are still investing in technology stocks, however there have definitely been some extreme moves. This chart, showing the BVP Nasdaq Emerging Cloud Index, measures the valuation of cloud software companies.
We therefore have to be more selective about the stocks we are choosing. It often means we are trying to find the next Atlassian or Paypal and this takes us out of the US. However, we also see some of the dominant brands like Microsoft, Amazon etc as having large opportunities to invest, especially around cloud computing.
Active management brings choice
Active management means we can choose which stocks we think have the brightest future and weight them appropriately, whereas an ETF automatically weights the stocks by their market capitalisation, so the largest stocks are the biggest weighting. This may not be ideal. Active management also means we can buy and sell stocks quickly, depending on market conditions. This can be helpful during periods of volatility.
The future of buy now, pay later (BNPL)
We think there is a structural shift under way, away from credit card usage. People are shying away from the use of credit cards and the unwanted interest costs they incur. Instead they are using debit cards and buy now, pay later systems (BNPL). BNPL is a way of spreading the payment without going into debt or incurring interest. You may be familiar with BNPL systems like Afterpay, where a consumer buys a product and the price is paid off in four installments. We think the popularity will last, however there is likely to be consolidation in the industry as there does not need to be a plethora of providers. The benefit these companies provide to retailers is predominately a customer acquisition tool, and therefore retailers are happy to pay more than they would for a typical payment processing.
Get in touch
To download our product disclosure statements, go to www.piefunds.co.nz. Past performance is not an indicator for future returns. This information is general in nature only. You may wish to discuss with an expert before relying on it.