- The stock markets have tanked lately, and tech stocks have been hit particularly hard.
- Not long ago, betting on the biggest tech companies was a winning strategy, but no more.
- Going into next year, investors are going to have to be more selective about their tech bets, said Dan Morgan, a longtime tech backer.
- Morgan’s advice: Bet on the cloud.
With the markets in turmoil, shedding loads of value seemingly by the day across the board, it’s no longer a sure thing to bet on the tech sector or even its most prominent companies.
It used to be that investors could put some money in the famous FAANGs — Facebook, Apple, Amazon, Netflix, and Google parent company Alphabet — and be assured of doing well. But Apple’s and Google’s stocks are down for the year, and Facebook’s has fallen off a cliff. While both Amazon’s and Netflix’s shares are still up for the year, they’re way off their highs.
What’s more, Wall Street analysts are forecasting that the technology sector’s profit growth rate will slow dramatically next year after being boosted by President Donald Trump’s tax cut this year, said Dan Morgan, a longtime tech investor with Synovus.
Going into 2019 “you just have to be very discerning in the tech sector,” said Morgan, a portfolio manager at Synovus Trust. He continued: “You have to do your homework and zero in on some of [the] trends.”
So what’s an investor to do? What are the big trends to watch?
Many tech sectors are looking uncertain right now, Morgan said. Although he’s not predicting a recession next year, he does think economic growth will slow, and that will hit some areas harder than others.
The consumer sector in particular looks shaky right now, because many of the big companies face other obstacles in addition to a potential economic slowdown, he said.
Apple’s stock, for example, is highly dependent on its ability to sell iPhones, and those sales have begun to decline, he said. Google’s and Facebook’s business models, built around collecting highly personal information from consumers, have come under increasing scrutiny amid a series of privacy and other scandals.
Netflix’s and Amazon’s stocks and businesses have held up, but both look to be the exceptions in the consumer technology sector that prove the rule, he said.
So Morgan’s advice is to look to the cloud.
Spending on cloud services is growing at a rapid rate as businesses of all sizes increasingly shift their technology spending to them and away from their own data centers, Morgan said. The industry will soon see a $10 billion windfall from the US Defense Department, which is planning to move some of its own computing infrastructure to the cloud as part of its Joint Enterprise Defense Infrastructure (JEDI) program, he noted.
“That’s an area that’s still very strong,” he said.
In fact, he thinks the prospects for the area are so good, his theme or 2019 is “roll into the cloud.”
With that in mind, here are Morgan’s top picks in tech going into 2019:
Salesforce is the leading company in the software as a service (SaaS) sector, which is not only the one of the fastest-growing areas in tech but one of the fastest-growing even in the rapidly advancing area of cloud services, Morgan said. The SaaS industry is expected to grow at a compounded annual rate of 33% a year from 2017 to 2022, he said. The overall cloud market is expected to grow by 17% a year over that period.
Marc Benioff’s company should be the big beneficiary of that growth as businesses shift their customer-relationship management operations to the cloud, and away from traditional server-based software, Morgan said. The company’s share of the SAAS market — 34% — is almost six times as large as that of its nearest competitor, Microsoft, he said. And it’s successfully fended off bigger rivals, including Benioff’s former employers at Oracle, over the last 20 years since it helped launch the SaaS market.
Salesforce’s “pioneering position has helped make it a key platform provider attracting considerable enterprise interest and activity,” Morgan said. The company, he continued, “continues to reap the early-mover advantage in the cloud customer-relationship management … market.”
The fact that Microsoft now has a higher market value than either Apple or Amazon, both of which were worth more than $1 trillion a few months ago, says a lot about the shifting fortunes in the tech industry away from consumer companies and toward cloud-based ones, Morgan said.
While all three companies are now trading well below that magical number, Microsoft “seems to be the one best capable of getting [back] to $1 trillion, at least in near future,” he said.
That’s because under CEO Satya Nadella, Microsoft has made a remarkable transition, going from a traditional software company to a cloud-focused one, Morgan said. Its Azure offering is the number-2 player in the infrastructure as a service (IaaS) portion of the cloud market behind Amazon Web Services. And it’s the leader in the platform as a service market (PaaS).
Microsoft provides a nice contrast to Oracle, Morgan said. Both companies thrived in the old enterprise software industry, selling companies licenses to run applications in their data centers. But while Microsoft has since established itself as one of the biggest players in the cloud market, Oracle is still trying to get traction for its cloud services, he said.
“To me, they’re bipolar opposites of each other,” he said. He continued: “It seems to me that Microsoft has beaten them to the mark in terms of making this maneuver to the cloud.”
Like Salesforce, Workday, the leader in cloud-based human resources applications, is benefiting as enterprise corporations shift their applications away from those that they run in their own data centers, Morgan said. The company counts more than a third of the Fortune 500 corporations among its customers, and has about a 9% share of the cloud human capital management (HCM) market, he said.
Workday is seeing booming business. In its most recent quarter, its sales were up 34% on a year-over-year basis, blowing through Wall Street’s expectations.
In addition to the ongoing move to the cloud, Workday is benefiting from competing in an area with no real leader, Morgan said. In the traditional HCM software market, SAP, Oracle, and ADP have all battled for share. Workday is gaining ground by offering a simpler user experience, he said.
“As late adopters to the cloud shun their on-premise applications, we believe Workday will gain even more market share,” he said.
Amazon’s cloud arm — Amazon Web Services — dominates the infrastructure part of the market and is the No. 2 player to Microsoft in the platform part, Morgan said. AWS is hugely profitable, providing more than half of the entire company’s operating income despite accounting for only 20% of its revenue, he said. And that should continue; AWS is likely to provide more than half of Amazon’s profits next year.
The problem for Morgan is that AWS is tied to Amazon’s core retail business, which has low profit margins and is a “tough” business. If Amazon were ever to separate out AWS as a standalone company, Morgan would dump all of his stock in Amazon and invest the proceeds in the cloud business.
“AWS is still the ‘crown jewel’ for [Amazon] investors,” he said.