26 May 2016. Technology shares are the stars of the show on Wall Street, with Apple, Amazon, Facebook, Netflix, etc. making an entrance to present their quarterly reports. According to Anders Tandberg-Johansen, technology expert at DNB Asset Management, their performances varied. There were both rays of hope and disappointments for the investors. Apple has an ongoing innovation problem and the market shares and profit margins of Netflix are at risk. And while Microsoft continues to polarise as usual, not even the regulatory authorities can stand in the way of Google’s growth story.
The reporting season is drawing to a close in the USA. The hurdles that companies had to take were considerably lowered. With the global economy flagging, analysts revised their profit forecasts for US companies downward by an average of 15 per cent – the most significant downward revision since early 2009. Fund managers in particular are keeping a close eye on the figures. Anders Tandberg-Johansen, Global Head of Technology and fund manager of DNB’s 2.4 billion euro technology portfolio, offers an insight into his high-growth universe and provides an overview of the reporting season.
‘On the whole, the results were weak in the first quarter, but there were a few strongly performing outliers,’ says Tandberg-Johansen. One of these was VMware. The shares of the software company that specialises in server virtualisation appreciated by just under 14 per cent after its results were presented. ‘Expectations were low and the figures were robust,’ says Tandberg-Johansen. DNB’s Technology fund recently increased its position in VMware following a research trip to Silicon Valley. An 80 per cent stake in VMware is held by EMC. Once their merger is completed, EMC and Dell will operate under the name Dell Technologies.
Microsoft polarises
‘The picture offered by the software sector in the first quarter was generally a mixed one,’ says Tandberg-Johansen. Microsoft’s results were weak because the market had anticipated a more advantageous mix of revenue figures. The results of the server and cloud business areas were disappointing. In addition, the first quarter proved to be worse than had been forecast. The Microsoft share depreciated by more than 7 per cent – the biggest slump it has experienced in a year. ‘Microsoft is one of those companies that are either given a very positive or a very negative outlook – that’s not something you see very often,’ says Tandberg-Johansen. DNB recently marginally increased the weighting of Microsoft in its fund on current price levels, although it remains very much underweight. Demand for the shares is set to be increased not least by means of share buy-backs and dividends.
In the software sector, the SAP share is a firmly established part of the DNB Technology fund. SAP’s published figures exceeded the low expectations and its share price increased. ‘The market has been expecting SAP’s traditional business to fall off the cliff, but it has actually continued to be highly profitable. The next quarter will be a strong one,’ Tandberg-Johansen states.
Apple’s biggest problem
As ever, there was a great degree of media hubbub surrounding Apple. The iPhone manufacturer took everyone by surprise in a negative way once again by publishing weak quarterly figures. ‘Apple’s biggest problem is its lack of convincing innovations. But this may be the new norm. They really need to pull something out of the hat if they want to perform better than they have recently,’ comments Tandberg-Johansen. His fund remains significantly underweight.
Apple’s arch-rival Samsung released considerably better figures. The new Galaxy 7 is selling better than forecast and the outlook for the current quarter is positive. ‘We are happy with our position in Samsung,’ says Tandberg-Johansen.
Facebook proved to be another positive surprise, with its profits coming in 10 per cent higher than the most optimistic analysts’ estimate. ‘The results were very strong. Concerns about the sustainability of the online advertising sector are increasingly evaporating,’ says Tandberg-Johansen. The Facebook share recorded a double-digit increase.
Amazon presented the market with a combination of good figures for the first quarter and a cautious forecast. ‘As Amazon can essentially turn its expenses on and off at the press of a button, it’s not easy to come up with a forecast,’ says Tandberg-Johansen. The profit margins are high in the area of Web service business. Amazon is a leading provider of cloud-based business, and there are still high profit margins to be had in this field. But according to the DNB expert, there is the risk of ‘commoditisation’, i.e. that the service becomes something of a mass-produced commodity and that the profit margins dissipate.
Alphabet remains on the fast track
Google is becoming something of a rival for Amazon in the area of cloud-based business. The mighty search engine company which now goes by the name of Alphabet published figures for the first quarter that fell slightly short of expectations in spite of impressive growth rates. ‘That doesn’t mean a great deal. The growth story is very much intact and going strong, and the company’s share has been well rated,’ says Tandberg-Johansen. According to DNB, not even the spectre of the regulatory authorities is all that significant to the tech giant. ‘The company is moving very quickly. By the time a court has reached a decision, the business has already developed further. Google is elusive,’ says Tandberg-Johansen. What’s more, most of its services are free of charge, making regulation difficult anyway, he adds.
Netflix burning millions
Having been a star of the stock exchange just recently, it looks like Netflix’s glory days may be in jeopardy. The online film rental company’s outlook was disappointing. Tandberg-Johansen: ‘You can see the growth rates slowing down, which is worrying.’ Rival services such as Amazon Prime and YouTube Red are eating into Netflix’s market shares. According to expert appraisals, the company is also being hit by the rising costs of production and of purchasing films and TV series.
The technology sector therefore remains in motion, as ever. With its market-neutral DNB TMT Absolute Return fund, the DNB team also focuses on falling share prices in order to, for example, be able to exploit the transition from offline to online media on the short side too. The fund strives for a positive absolute return in the long term, independent of the market conditions, by adopting both long and short positions.
DNB is not all that optimistic in relation to traditional media. ‘In the case of subscription channels, we should at least expect to see higher revenues on the basis of rising subscription prices, but these do not appear to be materialising,’ says Tandberg-Johansen. DNB also anticipates falling share prices in the US telecom sector. ‘The quarterly figures released by AT&T and Verizon were in line with expectations, but the underlying trend is negative, with market shares being lost,’ says Tandberg-Johansen.
Palo Alto Networks, a manufacturer of firewalls and a market leader in the field of IT security is also considered too expensive in the eyes of DNB, so are other companies in this popular sector.
Entry opportunities with online travel agencies
Tandberg-Johansen is more confident when it comes to online travel agencies. The fund has invested in Priceline, the number-one company in this field in the western world, and in Ctrip, the market leader in China. Although the share prices are influenced by news about the economy and terrorism, the long-term picture remains intact, so DNB uses setbacks to expand its position. ‘We are very optimistic about both of these shares in the long term,’ the fund manager says.
2016 got off to a bumpy start. But with a performance of 0.89 per cent, the DNB Technology fund has not only left the benchmark behind by 1.80 per cent – it has also secured a spot among the top technology funds once again in this environment.
