Can big tech stocks get bigger? This fund manager thinks so
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MoneyTalks is Stockhead’s regular recap of the ASX stocks, sectors and trends that fund managers and analysts are looking at right now. In this edition we’re looking at big tech stocks.
Today, we hear from Chris Demasi, a portfolio manager at Montaka Global Investments which runs Montaka Global Long Only Equities Fund (ASX:MOGL) and Montaka Global Extension Fund (ASX:MKAX).
“A lot of the big cap tech names have been left behind and they’re very well known names but they’re not necessarily well owned right now despite the fact that they have trillions of dollars of market cap. In fact, that’s probably part of the problem,” he told Stockhead.
“Some of the commentary and the pushback we get against these – and it’s seemingly become consensus view – has been with the view that these companies are too big, they can’t get any bigger. It’s that they’re already past their most exciting growth period, they’re boring compared to some of the other companies out there.
“We don’t think that’s true.”
Demasi thinks many big tech stocks still have potential for growth that investors are underestimating or just not recognising right now.
“That’s true, as much of their core businesses are still growing really strongly – I think people underestimate how long it will persist – but it’s also true with the growth options they’re going have in the future,” he said.
“One of the defining characteristics of the big tech businesses of our time is that they are of a quality and scale that we just have not seen before.
“And that’s allowing them to pursue new opportunities in new markets with new clients, and it’s really all over the world, it’s truly global distribution. And I think that really opens up the addressable market sizes for a lot of these businesses.”
Microsoft recently became a US$2 trillion company and makes hundreds of billions of dollars in revenue.
“It already seems numbers are really big there, but when you take it into context of trillion of dollars – the estimates of the CEO Satya Nadella is that annual corporate IT spend could increase by $6-8 trillion over the coming decade – Microsoft is in the box seat to capture such a large share of that through their cloud computing platforms, both Office and Azure,” Demasi said.
“And yet they only need to capture small fraction of it for that to make a massive difference to their already massive business.
“So even though it’s a $2 trillion market cap today, I think that’s the sort of thing where in a few years time we’ll sitting here and talking about the first company to be a $5 trillion market cap and we’ll probably be talking about Microsoft.
“But the numbers always seem hard to reach and almost nonsensical in our human mind because we think these companies don’t grow, but they’re moving exponentially.”
In speaking with Demasi, Stockhead raised the example of Xero, one of the more prominent “big tech stocks” on the ASX.
Xero is a company that started as an accounting platform in Australasia but has gradually branched out globally and become a broader all-round platform to help run businesses. In doing so, it’s reaped the benefits with its exponential growth since its ASX listing.
“I reckon that’s the point and I think, when we have the luxury of looking globally and companies we’ve invested in, these mega cap businesses have the luxury of being able to scale globally, so you take that example and multiple it by a big margin,” Demasi said.
Demasi also pointed to Google, noting even its core advertising business had some runway with online advertising only just recently surpassing 50 per cent of the total advertising industry.
But its core business required a lot of IT infrastructure and now Google has begun to leverage it.
“It was this year they split that out in the financials and that one line just happens to be third largest cloud computing in the world and growing at rates of nearly 50% per cent per annum,” he said.
“And it’s amazing, who would’ve thought of investing in Google 10 years ago, five years ago or maybe even last year because it was going to be one of the top three cloud computing platforms in an industry that’s going to be multi-trillion industry over the next decade?”
“You just wouldn’t have thought about it it that way, but because of the excellent quality of these businesses they’ve gone in one market and being able to shoehorn it into additional massive market places as well.”
Demasi continued alluding to Amazon, the other “top three cloud computing platform” noting it and its fellow big tech stocks faced a big opportunity.
“Talking about these cloud computing businesses, I think only about 10 per cent of workloads around the world are sitting in infrastructure and platform as a service [or] cloud computing as opposed to on-press servers and so there’s just this tremendous runway that’s already been stitched up by the big three players,” he said.
“And you look at something like Amazon, not only does it have cloud computing but they’ve had a digital advertising business that’s now a US$20 billion plus revenue run rate business.
“That’s staggering size but that’s been something they’ve been able to cultivate and add not just as a feature, it’s becoming its own business in the same way as their logistics and fulfilment centres – they have served themselves first but they can open those up to third parties and start charging for them.
“So you take that Xero example, where a company comes in, they start with one core market and perform very well in that and have some opportunities around that. It’s staggering – the extent of these opportunities for these mega cap tech business.
“And yet you look at their stock prices and the market’s not reflecting that.”
The views, information, or opinions expressed in the interviews in this article are solely those of the interviewee and do not represent the views of Stockhead.
Stockhead does not provide, endorse or otherwise assume responsibility for any financial product advice contained in this article.
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