Technology stocks hit a brick wall during the first half of 2022, leading some investors to wonder if the digital revolution has run its course.
Not likely, according to equity portfolio manager Chris Buchbinder. “Rising interest rates and inflation have certainly clouded the longer term earnings picture for many of these companies. For those with limited earnings today relative to their market values, the pullback was warranted, but I believe there are also well-run software companies in fast-growing segments with favourable prospects.” Buchbinder explains.
The cloud services business, as an example, has rapidly expanded as businesses move their traditional enterprise IT functions to the cloud.
“A few years ago, when Amazon Web Services was introduced, it was really a new business segment,” Buchbinder says. “It’s no longer new, but we are still in the early days of this transition.”
Microsoft was not the first mover in this market, but it is growing faster than AWS and Google Cloud thanks to its strong legacy enterprise relationships. As of April 2022, the cloud services division of Microsoft achieved 32% quarterly growth from a year earlier, putting it on a path to reach nearly US$100 billion in annual revenue.
“It is not a certainty that all cloud businesses will realise the profit growth to justify high valuations. That is why selective investing through fundamental research is essential.”Christopher Buchbinder, Equity Portfolio Manager at Capital Group