The Technology Sector: Determine Fad from Fantasy

There’s your average long term investor, and then there’s Alfred Feld.

Mr Feld recently died at 98 after – get this – eighty years with investment bank Goldman Sachs.

The Australian tells us he began as an office boy in 1933. Later he chose stocks and investments for clients, what today we would call ‘wealth management’.

Just off the top of our head, in financial terms that means he lived and invested through the Great Depression, the 1937 stock market decline and the Second World War. Then came the post-war baby and stock market boom and later the collapse of the Bretton Woods agreement.

In the 1970’s was the OPEC oil crisis and economic stagflation. Then came the twenty year gold bear market, the 1987 Wall Street collapse, the technology bubble of the 1990’s, the housing bubble, and the subprime collapse and panic of 2008.

Not to mention the rise and fall of countless companies and industries. That kind of puts the next quarterly update into a bit of perspective.

The only one constant for Feld was the same for all of us… 

The Nasdaq Rises Again

And that’s change. And right now the one thing Feld admitted he never really got – technology – is driving big change.

In case you missed it, the Nasdaq went over 4000 points for the first time in thirteen years this week. The Nasdaq is America’s second biggest stock exchange. It’s largely seen as a proxy for the technology industry and growth. Big technology stocks like Microsoft, Apple, Facebook and Amazon are listed on it.

You’ve no doubt heard of the Nasdaq, famous to this day thanks to one of the biggest, most insane stock market bubbles in history.

That was in the late 90s, when it went from 1000 points in 1995 to over 5000 in the year 2000. Many companies had unbelievably high valuations because it was a ‘new era’. This was despite the fact that some companies didn’t have any revenue, let alone profit. 

A lot of those companies went bust and investors lost millions. Investors have been wary of technology ‘stories’ ever since. Now, there’s no point getting too carried away from what’s happening on the Nasdaq. It’s taken 13 years to get back to where it is now.

But the way events are going, no investor can afford to miss what’s happening in the technology sector. That’s because it impacts on so many different industries.

Take gaming company Aristocrat Leisure [ASX: ALL], for example. The Australian Financial Review reported this week that,

‘For the first time in its history, Aristocrat Leisure will next year release digital versions of its new poker machine titles to personal mobile devices before they hit casino floors…It also comes as Aristocrat’s social casino platform, Product Madness, is growing at such a rate it looks likely to be split out of the company’s fledgling “online” reporting line at next year’s full-year results.’ 

You can only use Product Madness in your Facebook account. According to the AFR, Aristocrat will release the stand alone Android and IOS apps for mobile devices next year, as well as distributing digital poker machines to online casinos in the US.

Aristocrat is defending its position in the industry here in Australia from Ainsworth Game Technology [ASX: AGI]. Ainsworth is up over 100% for the year and taking market share off Aristocrat in the traditional gambling space. No doubt Ainsworth has digital plans on the boil, though we aren’t aware of anything yet.

We know plenty of people object to gambling companies as a matter of principle, but we’re using Aristocrat here simply as an illustrative example of how ‘disruptive tech’ can change entire industries and even influence other sectors.

If people are gambling online, maybe they don’t need to go to the pub, or won’t as often. That affects the hospitality industry, and beverage sales. If it’s easier to gamble, perhaps more people will, and consumer spending will shift. Discretionary retailers might suffer.

Aussie companies who previously couldn’t compete in the hyper competitive markets of the US and Macau might find they can win market share. 

There’s no ‘safe’ business model. Technology means you have to adapt or die. 

How Excited Will Investors Get? 

Gayle Bryant reported on some renewed interest in the technology sector in the Australian Financial Review on Wednesday.

He quoted Bell Direct chief executive Arnie Selvarajah as saying,

While momentum has been created by listings such as those by Twitter and Facebook, there have also been standout performers, which tend to be the companies that are disrupting business models.

He then cites a company called nearmap, which is up 1400% over the past 12 months.

Interestingly, Bryant quotes Platinum Asset Management chief exec Kerr Neilson (one of Australia’s best investors). Neilson comes across as a bit miffed about the lack of excitement from investors toward technology in general. The hard part, says Neilson, is to ‘discern fad and fantasy from long-term winners‘. 

One way is to check out Revolutionary Tech Investor.

You could do worse than focus on one area they do: medical tech, set to grow as the western world ages and the baby boomers go into their later years.

Revolutionary Tech Investor editors Sam Volkering and Kris Sayce have their eyes squarely on the canary in the coalmine: Japan.

Here’s a graphic of Japan’s demographic profile from a recent RTI update: 

Source: United States Census Bureau
Click to enlarge

Japanese society is old and getting older. To really ram the point home, we recall reading some time ago that adult nappies outsell baby ones in Japan. There’s a massive market for healthcare.

The RTI editors say that means tech-savvy investors should look into regenerative medicine. The Japanese government has just moved aggressively on this issue.

Here’s the breakthrough news, as reported by the Japan Times:

‘The Upper House passed a bill Wednesday aimed at ensuring the safety of regenerative medicine and another to revise the pharmaceutical affairs law to promote safe and swift treatment using induced pluripotent stem (iPS) cells and other stem cells…

‘The revised pharmaceutical affairs law defines medical products containing stem cells as regenerative medicine products. It allows the government to approve such products conditionally even when their effects are not verified, if their safety is confirmed in clinical trials.’

According to Kris, this is a big deal. He argues that in effect, the new laws in Japan mean that stem cell companies don’t have to provide proof their treatment works, only that it doesn’t cause harm. The stem cell companies can ‘fast track’ their treatment straight to market.

The good news is there are some Aussie and ASX-listed companies flying the flag in this space. You can check who they are by clicking here. Stay tuned.

Callum Newman+
Editor, Money Weekend

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Callum is a feature editor for Money Morning. He covers areas of interest arising from world markets and the global economy that could mean new investment opportunities for Aussie investors. If you're already a subscriber to these publications, or want to follow Callum's financial world view more closely, then we recommend you join him on Google+. It's where he shares investment insight, commentary and ideas that he can't always fit into his regular Money Morning essays.

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