The lockdown has jeopardized business globally, leading to an inevitable slowdown of the economy. However, not all companies are being negatively affected by this pandemic; Technology and Communication Service businesses are proving to be less susceptible to the sudden economic deterioration. The litmus test for such differentiation is the recent performance of the NASDAQ vs. the S&P500:
Chart: Nasdaq-100 vs. S&P 500 Sector Weights; S&P 500 Performance
Technology is nowadays a defensive sector
The Technology sector is more attractive in periods of increased macro uncertainty due its defensive nature: in general, Technology companies, when compared to other sectors, have a superior balance sheet, higher cash flow, low debt levels and relatively “assets-light” businesses. Historically the Technology sector has also been mostly agnostic to the direction of Interest Rates.
Powerful secular growth
The recent surge in demand for digital services should not be dismissed as a temporary phenomenon that rewarded technology stocks only short term. Technology will continue to offer investors a lot of opportunities, based on a strong secular growth cycle that is largely independent from the economic cycle. In some cases, the technology product cycle can even be counter-cyclical due to its cost-cutting and productivity enhancing proposition to the end customers.
Identifying valuation discrepancy
One of the driving elements behind the consistent outperformance of Technology Companies is their persistently high level of Capex and R&D spending as percentage of sales. Such investments allow these companies to maintain both high barriers to entry and higher margins but can also constitute a drag to profitability and consensus expectations in the near term. The gap between short-term earnings expectations and longer-term earnings realization offers an opportunity to the smartest investors to buy into a multi-year, secular growth wave at a discount.
The information in this article should not be regarded as a description of services provided by Delian Partners SA. The opinions expressed in this article are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security or investment product. It is only intended to provide education about the financial industry. The views reflected in this article are subject to change at any time without notice.
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