Author: Matthew VincentPublished by
On December 12 1980, an initial public offering of shares in Apple Inc valued the maker of beige desktop computers at $1.7bn. Then, in 1985, co-founder Steve Jobs departed and, over the next 10 years, the maker of his revolutionary but still beige Macintosh computers only increased its value to $3.9bn.
By 1997, however, Jobs was back and, two years later, the maker of web-friendly greeny-blue iMacs was worth $16.5bn. In 2010, after three years' sales of silver-edged iPhones, Apple overtook Microsoft's market value of $229bn.
Then in March 2017, Apple's valuation hit $800bn, on news that Brian White, an analyst at Drexel Hamilton, was forecasting a $1tn market value within 12 months.
Such a rapid, and colourful, rise can be hard to comprehend, especially if you are the Netherlands, Nasdaq, the Congressional Budget Office, or an iPhone user with a non-American accent. Those first three are probably asking, respectively, how Apple can be worth more than a nation's gross domestic product, an entire stock market, or a full-year's US deficit. Meanwhile, those international iPhone users are possibly still trying to ask Apple's Siri voice-activated "assistant" anything at all.
Some investors are also questioning whether Apple's valuation makes sense. In May, reports suggested that hedge fund managers Daniel Loeb and David Einhorn had cut their stakes. However, with Apple and other tech mega-caps representing one-sixth of global equity indices, the bigger question is: can your wealth manager afford not to hold them?
"The fact that Apple became the first US company to clock up an $800bn market cap is testament to the fact that tech can't be ignored," argues Thomas Becket, chief investment officer of Psigma Investment Management. "This is more than the value of Walmart, General Electric, Pfizer and Kraft Heinz combined! And that's before we consider the likes of Facebook, Amazon, Netflix and [Google owner] Alphabet . . . It doesn't take Einstein to work out that ignoring tech is going to make for huge active risk against a benchmark for a global equity growth portfolio."
But what about a more value-orientated or absolute return portfolio? Can sizeable allocation to large-cap tech stocks carry too much downside risk? WH Ireland notes that valuations have not been driven entirely by profits. Tech stocks have been trading on expanding earnings multiples as growth expectations rise - 196 times historic earnings in the case of Amazon.
Still, the fact that most multiples are below the "frothy" levels seen in 2000 and that most balance sheets are much stronger, means Rothschild Wealth Management will "usually have a significant position in the sector".
Jean Médecin, who serves on the investment committee at Carmignac, believes the profit growth of US tech stocks is enough to justify the country's 55 per cent weighting in global equity indices, even though the US economy is only 25 per cent of world GDP. "This huge 30 per cent discrepancy is not dissimilar to Japan's in the late 1980s but . . . companies such as Facebook or Alphabet have developed fast-growing and very profitable activities, which fully justify their current huge market capitalisation."
Stonehage Fleming, the multi-family office, reminds clients of further contrasts with the last tech boom. Gerrit Smit, manager of its Global Best Ideas Equity fund, cites the large tech groups' strong free cash flow generation, operating margins and returns on invested capital, and "huge amounts of excess cash".
For many, then, it is just a question of how to maintain exposure. Becket at Psigma favours US large-cap growth funds, such as Montag & Caldwell's, complemented by specialist funds that capture industry disruption, such as the RobecoSAM Smart Materials fund. WH Ireland opts for the specialist Polar Capital Technology.
But at Pictet, chief investment officer Cesar Perez Ruiz prefers individual stocks - and only those already growing faster than the market, given a competitive environment in which regulation may increasingly mean that the "winner takes it all".
For Carmignac, the sooner the "winners of tomorrow" can be identified, the better. It currently likes the look of Latin American ecommerce group Mercado Libre because while its market is a tenth of the size of North America's, its valuation is 40 times smaller than Amazon's.
And justifying tech stock valuations to clients is nothing new.
In December 1980, stockbrokers in Massachusetts were prevented from buying Apple shares by a state law. It forbade participation in share offers priced at more than 20 times earnings. Even then, when the best Apple could offer was the clunky beige III PC, its shares were on a multiple of 90.
This article was written by Matthew Vincent from The Financial Times and was legally licensed through the NewsCred publisher network. Please direct all licensing questions to email@example.com.
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