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Testing Times For Tech
9 March 2021
In this episode, Susannah and Sarah discuss the question marks over the tech sector, before speaking to the CEO of a global IT solutions business about cyber security. Sophie Lund-Yates highlights where some big-name technology companies stand right now and Emma Wall talks to Jeremy Gleeson, manager of the AXA Framlington Global Technology fund about trends in cloud computing.
This podcast isn’t personal advice. If you’re not sure what’s right for you, seek advice. Tax rules can change and benefits depend on personal circumstances.
Susannah: Hello, and welcome to Switch your Money On from Hargreaves Lansdown. I'm Susannah Streeter, I'm the senior investment and markets analyst at Hargreaves Lansdown. And I'm here with Sarah Coles, our senior personal finance analyst. I don't know about you Sarah, but it has been a very odd week, carrying on our everyday lives, writing articles and recording podcasts at a time when there is a conflict in Europe.
Sarah: Yes, it has felt oddly disconnected when you finish a day of talking about thinks like child benefit or mortgages and go back to the news about what's happening in the wider world.
Susannah: And yet at the same time, we're more connected than ever to it, with people broadcasting or posting to social media from their basements on their smartphones. The crisis has shown yet again the transformative power of technology, but this comes at a time when on the stock markets - there has been plenty of question marks thrown up about their value - with the tech sector under pressure since the start of the year.
Sarah: So it's only right that we take those twin tracks in today's podcast, looking at the financial and technological implications of the conflict in Ukraine, against a challenging backdrop for companies, in an episode we're calling - testing times for tech. We'll be speaking to Richard Skellet, CEO of IT solutions business Allied worldwide. Richard, thanks for taking the time to talk to us I know you're a busy man - in a busy time for the business.
Richard: Yes, it is, very serious times all around us at the moment.
Sarah: We'll also chat to Sophie Lund-Yates, our lead equity analyst at HL - who's been looking at technology companies and where they stand right now.
Susannah: And we'll hear from our head of investment analysis and research Emma Wall - who's been talking to Jeremy Gleeson, manager of the AXA Framlington Global Technology fund.
Sarah: And Susannah has been building another quiz for me to do incredibly badly on. This time she has been looking into great technology predictions that have been made throughout history.
But before we go any further, we need to take a closer look at the Russia/Ukraine conflict. Clearly for anyone caught up in it, the impact has been unimaginably horrific, and the primary concern will always be for the real human cost of this violence and destruction.
But the impact is incredibly widespread, and in an interconnected world, it also affects our finances. There's a risk that among everything else it could push up prices at a rate we haven't seen for decades. Some analysts are predicting inflation will peak above 8%, and higher rates will persist for longer. We haven't seen CPI above 8% since summer 1991, so this is going to come as a real shock to us.
Susannah: Yes, that consumer Price Index really is soaring and the attack on Ukraine isn't just a humanitarian crisis, it could have far-reaching implications for global trade, which will feed into higher inflation. Gas prices are a major issue. In the immediate aftermath of the invasion, UK gas prices rose between 40% and 60% higher, and although they subsequently fell back, further disruption may well send prices sky high again.
The UK gets less than 5% of its gas from Russia, which means it's less exposed to shortages, but it is still exposed to international markets, so less supply will push prices higher.
Sarah: And of course, with 85% of our homes heated with gas central heating, it's going to mean higher energy bills. We're already facing the horrors of a 54% rise in the price cap in April, but if wholesale prices stay high, it could mean more eye-watering rises when the price cap changes again in October. One analyst has suggested that your annual energy bill could rise as high as £3,000.
And The oil price has also jumped.
Susannah: Yes. Oil prices jumped to over $100 a barrel after the invasion, and they've been climbing higher since then, proving extremely volatile, above $130 at some points. This is going to impact the cost of filling up at the forecourt, but it will also feed through into the cost of manufacturing and distributing everything, from furniture to food.
Sarah: Yes, there are separate pressures on food too, because Russia and Ukraine are major exporters of wheat. And while the UK isn't a major export market for its wheat, it is exposed to international prices, which again shot up after the invasion.
It is all putting pressure on people's finances, at a time when they're already facing the biggest cost of living squeeze in a generation.
Things are changing dramatically every day, but this will be something to keep a close eye on. But in the meantime, we need to talk technology.
The price of tech stocks was hit at first wasn't it?
Susannah: Yes, the shock of the invasion sent sectors across the board falling - with the tech heavy Nasdaq Composite in the United States dropping 2.5% on the day Russian troop rolled across borders.
Although it recovered, stocks have since remained highly volatile
And remember this came on top of a whole list of worries which have emerged this year from inflation and the cost-of-living crisis to rising interest rates which have caused turbulence on stock markets, particularly in the United States since the start of the year - with tech stocks down around 15%.
Concerns have been particularly acute for high growth tech stocks, which have borrowed heavily to invest and there are more worries about their performance in an era of higher interest rates.
Sarah: All this concern of tech stocks will ring some bells for anyone who bore the brunt of the dot com bubble bursting, but this is a bit different isn't it?
Susannah: Well certainly not all tech stocks are created equal - companies have very different business models and prospects - from regulation to user numbers - there are huge differences between them - and this is an area we will be drilling down into with our lead equity analyst Sophie Lund Yates shortly.
But there are some trends that have been affecting the sector as a whole. The last few months have seen growth stocks fall out of favour. That's why the NASDAQ, which houses many of the world's tech giants, has suffered large losses, along with wider tech indices.
Tech stocks tend to sit in growth sectors - although not all of them do. Growth investors, you won't be surprised to hear, look for businesses they think are likely to grow. They hope to profit as the share price rises in line with improvements in the underlying business. This sometimes means paying a bit more for these perceived long-term strengths.
The opposite investing style is 'value' investing. Value investors look for companies that appear undervalued - where they think a company's assets or profit potential aren't fully reflected in the share price. They hope to profit when other investors later recognise this value, and the share price rises to reflect it.
At times of rising inflation and interest rates, investing in highly valued growth companies becomes less attractive. That's because investors can receive a greater interest rate on their cash savings, making the risks of investing feel less necessary, and therefore less appealing.
Sarah: Yes, and as we were talking about earlier, inflation is rising, so overall, there's less appetite to invest in more expensive companies. At the same time, investors are realising that some of the downward pressure on value names during the pandemic might have been unfair. The net effect is a rotation in what investors prefer.
Another issue affecting the sector, which has been brought into sharp focus with the escalating situation in Ukraine is the need for companies and organisations to keep a keen eye trained on just how cyber secure they are.
Immediately after the invasion there was a surge in suspected Russian sourced cyber-attacks. In the UK the government has reportedly held talks with the National Grid - about possible attempts to disrupt the energy system. But a digital war is also being fought and tech giants have come under increasing pressure about whether they should block content to Russia and also stop the spread of disinformation
Sarah: So, let's check in with Richard Skellet, who runs an IT solutions company that takes in everything from cloud computing to cyber security.
So, Richard, can you start by telling me a little bit about your business?
Richard: Yes, and thankyou very much for the invite today. We've got some very serious issues and how can technology go off and help some of these challenges in our business? One is around social grey, because we think that we have a wonderful opportunity to be able to look at levelling up. And the other aspect of this is looking at the operating model - we've focused in to looking at helping an organisation to become a mutable business, we're looking at enabling an organisation to be in a permanent state of reinvention. We have cost as a reoccurring symptom. Is technology in a position, particularly when we think around service integration operating model change, are we in a position now where we can be thinking about, and is it possible essentially to remove business overhead?
Susannah: So, you think then that you maybe better positioned in an era of higher inflation as companies seek to really drilldown on their overheads?
Richard: Yes, absolutely. We've all got these cost challenges. Can we solve cost at root cause for it not to return? I'm an investor, I'm looking for return on investment and I don't want to be having to worry about cost and budget. These things are in contrast to each other - we want to be able to have an organisation that can manage a return-on-investment base, as opposed to cost and budget.
Susannah: When you see the stock market woes of listed technology companies, does it give you any concern for the future of the industry?
Richard: Absolutely, of course it does. Not just for the industry, but for the effect it has on people's pensions, much of which will be in technology stock.
Sarah: You're talking about technology companies and taking the opportunity to drilldown into cost - is that something they have the headspace for at the moment? It does seem that we're kind of going from one crisis to another. Are people taking this opportunity to look at the bigger picture and make these big forward-thinking changes?
Richard: Unfortunately, not. Most organisations are really quite silo-focused. If you look at say, the convergence around technology as an example, and operating model change. Until we begin to see these things coming together in a unified orientated way, we'll continue to see finance deal with finance, HR deal with HR, technology deal with technology, marketing deal with marketing. There's a whole issue with how you begin to pull these together to enable a different operating model. Because it's very clear that the existing business operating model is no longer fit for purpose.
Sarah: How do you go about changing that, what's the thing that's going to make the difference?
Richard: One of the largest costs that organisations have is in regards to people. We're in a world now where everything and anything which is process-based can be automated. So, we're in the age of a digital worker, and a digital worker works 24-7 and never sleeps. A human worker is 8 hours a day. So, thinking about how we begin to think about human workers and digital workers coming together.
Sarah: It sounds like a lot of what you're having to do as a technology business is kind of imagine what the future is going to be like and then build something for that future. How easy is it to put that together and work out what the trends are going to be and where the demand of the future is going to lie?
Richard: When you look at piecing things together first of all, service integration and management is a very important area. You need to be thinking about the outcomes one wants in one's business. So, therefore we need to move away from talking about things like KPIs and so forth and be very outcome focused. So, it's not just the issue around integration and technology within the IT department itself - there's huge issues in terms of thinking about this integration which comes into marketing, into HR, into finance.
Susannah: What we've seen, particularly since the start of the pandemic is an accelerated shift into digital, but there has been a patchwork of services that are used by some companies in a race to get people into the virtual world. What kind of cyber security issues does that throw up?
Richard: Benjamin Franklin said that there's two things in life which are guaranteed - death and taxes. And the third thing that's absolutely guaranteed now is you're going to be hacked, whether individually or organisationally. So that takes you into thinking about, is the focus about trying to prevent or is the focus more about how you recover. Allied Worldwide is one of 17 companies in our group and one of our organisations that we work very closely with, is in the security business. When we think about hacking, there's some remarkable people with remarkable skillsets, and being able to try to look at protecting every single device you that have on your network is an impossible task, at the end of the day. So, the first thing you ought not to do is go off and shutdown - you don't want the hacker to know that you've now discovered them. So, you need to be thinking a lot more about not the tech, but the organisation itself - how do you manage the situation? So, the first thing one needs to go off and identify is that where do we think the hacker has gone. And one part of this, is are we dealing with really a professional organisation that is seeking information? We need to be looking at things in different ways, in each of the areas of the business that we think might have some form of problem. Because it's not always just about going off and hacking someone's personal data from an organisation, there's so much that goes on beyond that - ideas around sales and marketing, new products, IP, new creativity. So, I think there's too much focus basically on the personal data side.
Susannah: Now, obviously the conflict between Russia and Ukraine has put cyber security into sharper focus, with many reports of hack attacks. How well equipped do you think companies are to cope with growing threats from hackers.
Richard: I generally think that there very ill-equipped. And what we see often get published in the press is just a small fraction of what really happens behind the media. As I mentioned earlier, we've got a business that we've invested into and essentially, they operate at a top-secret level and, as a result, I'm able to see evidence of some very serious issues, particularly around some technology that's already out there, that you and I would be using daily. There are issues from a technology viewpoint that enables hackers and penetration, and I don't want to scaremonger here but, it's a real serious issue.
Susannah: But we are used to technology companies telling us much more optimistic stories about the future, partly to excite investors. Do you think there is a risk in the culture of big promises?
Richard: Well, I think that's one of the key things here is about the expectations that one sets. If you take the area of security, I'm not aware of any technology company would go off and say 'hey, we 100% guarantee, or even 99, 98 or 97% guarantee that you're not going to be hacked. So, when we're looking at technology companies I think effectively, they set an expectation and instead of over delivering on that expectation it tends to be under delivered, unfortunately. And, one part of the problem is, when we look at technology, we tend to talk about technology very much in isolation, so we'll talk about data, we'll talk about security, we'll talk about blockchain, the internet of all things. The big issue is that when you look at these subject matter technology companies, they're very silo based. It's the convergence of the technologies which is a big issue. So, one of the areas I think we'll see remarkable growth from is where we're going to see, particularly, service integration and management companies - not reselling technology solutions but more focused about helping organisations and technology companies themselves, on this convergence piece.
Susannah: Thanks Richard, it has been really interesting to talk to you. That is unfortunately all we've got time for; we could dive ever deeper into this subject and I'm sure it is one we will touch on again. But great to have you here on the podcast.
Richard: My pleasure and thank you so much for the invite.
Susannah: Now we can look at the implications of all this with Sophie Lund-Yates, our lead equity analyst here at HL, who has been looking at trends among listed technology companies. Sophie, let's talk about Meta to start off with because Meta has been in the news a lot recently, not least for it's dramatic fall in share price quite recently.
Sophie: Hi Susannah, yes absolutely, we can't really talk about the developments in the tech industry without talking about Meta because it's really in the eye of the storm as it were, for a number of reasons.
So, when we're talking about Meta, we're talking about Facebook's parent company, and it's been pretty badly punished in the last few months. It's currently trading on a price/earnings ratio, which looks at how much the market is willing to pay for one dollar of earnings, of around 16. That's much lower than the average and definitely not the kind of valuation you'd associate with an exciting tech name.
There are some valid reasons for the market's nervousness, to be completely honest. Meta is pumping billions of dollars into new IT infrastructure and its ambitions to build out the metaverse do little to quell the fear. Usership growth is also slowing, and advertising revenue is in for a period of stagnation amid inflation. That raises questions about Meta's competitive position in the face of mushrooming rivals like TikTok. The weaker outlook for advertising is especially concerning because advertising revenue is Facebook's bread and butter. When you think of Facebook, it is an advertising business, which I think gets lost sometimes from the day-to-day consumer. Marketing teams paying handsomely to make the most of the data footprints users leave behind. The well-publicised effort to create a metaverse is all very exciting but I'm reserving real opinion until we have hardened proof of exactly how it plans to make it a profitable reality.
That all the challenging stuff, there are some reasons for optimism though - around have the world's population logs onto one of Meta's apps (Facebook, Instagram, Whatsapp, Messenger) on a monthly basis. That is an incredible feat and means Meta's significance isn't going anywhere. Of course, data privacy and security, as we've been discussing at length already in this episode, is a really big one for Meta, and it could really do without another PR blunder in the current environment.
Sarah: We've already talked about the surge in cyber-attacks following the invasion of Ukraine - just how much will this be concentrating minds deep inside tech giants?
Sophie: I should say, obviously this is a huge concern for pretty much every company in global markets at the moment, but honing in on tech specifically, it stands to reason that a lot of tech companies in particular have to consider cyber risk. I think this is especially important when thinking about the growth of cloud computing, in particular. The sheer scale of cloud processing power, and the amount of data hanging around in virtual spaces is unfathomable.
It's definitely something the likes of Microsoft will be thinking about as its cloud proposition balloons. In general, cloud computing is a really attractive business model because it's higher margin which I've spoken about before. But I do wonder that with so few names in the cloud space, it makes a data or security breach a disproportionately big problem for the perpetrator because market share will be easy to lose. It's a small number of seats at the cloud table. As it stands Microsoft makes about $18bn in quarterly revenue from its Cloud business.
Susannah: Given this environment, what are the prospects for cyber security firm Darktrace?
Sophie: Darktrace is obviously a hot topic. It's a UK-based artificial intelligence specialist, focussed on cyber security. Its attraction in today's climate of constant cyber threat is easy to understand, and Darktrace's reach is huge - it works with well over 4,000 organisations across the globe. While the product is enviable there are some concerns from an investment perspective. The first is that it's yet to turn a profit, on its annual revenues of £281m, that makes it really hard to value the shares using my preferred metrics - that price/earnings ratio I mentioned earlier. Just because something sounds good doesn't mean you should buy it any price - bit like you wouldn't with a car. It also means investors should exercise caution, risk is elevated as there's no buffer for if things hit a rough patch.
The other end to consider is pretty huge political risk, Mike Lynch, Darktrace's founding investor, has now been ruled against in both a fraud trial and also an extradition hearing. This sort of thing tends to control the share price, and that could make things bumpy for a while.
Sarah: Thanks Sophie. It doesn't look like an end to the testing times for technology is imminent, so it will be an interesting one to watch.
Now I'd like to bring in Emma Wall, our head of investment research and analysis here at Hargreaves Lansdown has been speaking to Jeremy Gleeson, manager of the AXA Framlington Global Technology fund.
Emma: Hi Jeremy.
Jeremy: Hi Emma, how are you?
Emma: I'm very well thanks, how are you?
Jeremy: Yes, very good thank you.
Emma: So, markets are haywire at the moment. We're going to try and put that to one side and focus-in on some really interesting topics - technology, which I know is very much your bread and butter and talk about cloud computing. What is cloud computing?
Jeremy: We've probably seen the depiction, the graphic of a cloud in many different places. At some point, maybe 10-15 year ago, a lot of companies in the sector stopped talking about the world wide web and started talking about the cloud. Basically, it's just an alternative phrase to describe everything that was going on in the internet - a lot of exciting opportunities that were developing. And it's basically a coming together of developments around technology associated with broadband infrastructure, high scalable software and a widespread adoption of devices that we all carry around with us, that are always connected to the internet. So, that in a nutshell, without going into too much technical detail, is kind of what the cloud is.
Emma: And, in terms of what that means for you, as a professional investor. What opportunities is that creating, because we have heard some of the big players in tech - the Amazon's for example, talk about cloud as an offshoot of their business and a monetising opportunity, haven't we?
Jeremy: Absolutely, 3 companies seem to be leading the way in the Western world at least, with regard to cloud computing. I would argue that Amazon are very much the pioneer with their AWS (Amazon Web Services), Microsoft are up there too with their Azure product offering, and Google are third place but also growing very rapidly in this area with their GCP (Google Cloud Platform) business. What they're enabling companies to do, and this can be any size of company from sort of mega international organisations to small Mom 'n' Pop shops, is to get access to computing power that typically they would have had to purchase themselves. And that means historically, if you wanted to run a software application, you would have had to buy the hardware (the computers, the servers, the networking equipment), you would have had to buy the software and you would have had to the get someone to fix it all together for you, so it was all working. And all of that took time and took a lot of money and there was a risk that it didn't work. With the cloud, you can be up and running far quicker, as long as you've got a device with an internet browser, you can connect into using an internet browser into that software. That software is being run in the cloud for you. The easiest way of understanding that is Google Mail, or even Outlook if you use Microsoft Hotmail. Both of those are basically Email services being run in the cloud. You, as a user, do not have to buy any software to use them, you don't have to buy servers or Email equipment to deliver that Email to you, you literally just need a connected device and broadband connection.
Emma: So, essentially, it's outsourcing isn't it? It's the latest iteration of businesses outsourcing to a provider.
Jeremy: Absolutely, and if you want to get really technical, there's loads of acronyms and the 3 most popular ones are PaaS (Platform as a Service), IaaS (Infrastructure as a Service), and Saas (Software as a Service). It is outsourcing, it is basically paying the service provider or receiving, in the form of Email, in kind a service, which you're not buying outright, you're not owning outright.
Emma: Jeremy, thank you very much.
Jeremy: Thank you, Emma.
Susannah: Emma Wall our head of investment research and analysis at Hargreaves Lansdown there, talking to Jeremy Gleeson, manager of the AXA Framlington Global Technology fund.
Please bear in mind that these are the views of the fund manager and are not individual stock recommendations.
You're listening to Switch your money on from Hargreaves Lansdown.
Sarah: And finally, it's time for the quiz. And I'm braced for more of Susannah's incredibly difficult questions. I'm hoping at some point we'll focus in on something I know plenty about like savings and debt - or chocolate bars. But in the meantime, I'm prepared for another shocking showing in the quiz.
Susannah: Well, you never know, because I've gone back in time to look at some of the great technological predictions of the past, and I'm starting with Tomorrow's World from 1989, when I can imagine you were still watching kids TV.
The show predicted the world of 2020, but which of the following did they successfully predict would be in our homes by now: a smart speaker, smart lighting or movie streaming services?
Sarah: I wish I could remember, but it's going to have to be another wild guess. Was it the smart speaker?
Susannah: Yes, lucky guess. They predicted a speaker you could demand your favourite music from, although they did suggest you could shout 'Bach' and get to hear your favourite concerto, although you'd probably get some kind of dog-related reply if you tried that.
Let's see if you're on a roll. We'll go even further back for this one, to 1943, when the president of IBM calculated how many computers the company would go on to sell. To make it a bit easier, I'll take your answer to the nearest 100,000.
Sarah: That's impossible. I haven't a clue. I'll err on the side of caution and say 100,000.
Susannah: No, I'm sorry, the answer was actually 5. Not 500,000 but a total of 5 computers. To be fair to him, at the time computers were roughly the size of a house, so wouldn't have seemed like a mass-market product.
So, let's try something a bit more recent. In fact, I'm going to ask you just how recently this prediction was made. It was a quote from Bill Gates, who announced 'in 2 years spam will be solved', but when did he make this prediction?
Sarah: Well, I know he left day-to-day involvement with Microsoft back in the late 2000s, so I know he was definitely wrong. But I'm not sure how wrong. It's going to have to be another wild guess - how about 2005?
Susannah: You're so close, I'm going to give you that. It was in a speech to Davos in 2004. It was a bit wide of the mark, because there are currently around 122 billion spam messages received every day, so it's not entirely eradicated.
OK, let's finish up with the technology of fashion. In 1929 there was a fabulous material that was set to revolutionise fashion, but what was it? I'll give you some options: was it grass, PVC or asbestos?
Sarah: Oh blimey. Fashion isn't a forte of mine. I'd love for PVC to have been a fashion prediction in the 20s, but it may have been more of a 1970s development. I'll guess grass.
Susannah. No, sorry, apparently it was asbestos, which has the added advantage of being able to clean it by throwing it into the fire - which could save a fortune on dry cleaning. It was only much later that the problems with asbestos emerged.
Sarah: Blimey, yes I'm not sure that's the exciting new technology the fashion industry is waiting for.
Susannah: Well, that's all from us this time, but before we go, we need to remind you that this was recorded on 7 March 2022, and all information was correct at the time of recording.
Sarah: Nothing in this podcast is personal advice - you should seek advice if you're not sure what's right for you. Investments rise and fall in value, so you could get back less than you invest. Past performance isn't a guide to the future.
Sarah: Yes, this is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment.
Sarah: And this hasn't been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication.
Susannah: Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing.
Sarah: You can see our full non-independent research disclosure on our website for more information. So, all that's left is for me to thank our guests Richard, Sophie, Emma and Jeremy, and our producer Elizabeth Hotson.
Susannah: Thank you so much for listening. We'll be back again soon - so if you enjoyed this podcast please do let us know what you think and do subscribe wherever you get your podcasts, so you get a fresh new episode in your inbox as soon as it's ready. Goodbye.