We believe companies in the mature technology sector can offer an asymmetric way to play the themes of mobility, infrastructure and smartphones for the simple reason that there is little expectation of meaningful earnings growth in their valuations. However, a number of mature or ‘old-name’ tech companies are interlinked with the growth potential of many newer forms of technology and as such, we believe their growth potential may have been underappreciated.
Theme #1: Smartphones
In terms of cutting-edge smartphone technology, instead of playing the growth potential through the individual best-of-class companies like Apple and Huawei, we do so through a company like Qualcomm. Qualcomm is the owner of a vast swathe of intellectual property in terms of smartphone functionality. What makes it such a good prospect today is that it is a leading innovator in 5G technology, which will be the next big technological roll out across tablets, smartphones and other devices.
Qualcomm is a company that is device-agnostic, which means we do not have to take a view on the future growth prospects of any one smartphone producer, but instead, we are positioning to benefit from the future growth potential of 5G, which we see as a revolutionary step forward in mobile technology.
We believe the relative financial health of Qualcomm is another key attribute. Its financial status is such that it has purchased back up to 30% of its stock – despite spending significant sums on research & development, which makes it a company with high barriers to entry. Qualcomm is already the technology platform of choice for 3G and 4G operators, and in the current transition to 5G, all new devices will need to have Qualcomm intellectual property within them to be able to operate across all platforms.
Theme #2: Infrastructure
Like Qualcomm, Cisco Systems is another mature name in the technology sector. It has become good value on a relative basis because much of the market has become obsessed with The Cloud, as dominated by Microsoft and Amazon. What is compelling for us however, is that with the rapid rise of ‘smart cities’ and the internet of things, the areas where bottlenecks are occurring tend not to be at The Cloud end of the technology spectrum, but at the cutting edge: in other words the cars, cameras and various back-up systems that have a heightened need for instant processing power. Cisco’s business is all about connecting everything that sits within this smart world, and getting different technologies to ‘talk’ to each other.
We believe Cisco’s future is bright, but that it is underappreciated as a hardware technology company. The market tends to get more excited about software and data storage businesses which is now becoming a saturated and competitive market. The need to be able to process data in real time, for example, self-driving vehicles that can communicate with each other instantaneously, is starting to become every bit as important as being able to store data on The Cloud but is still, in our view, broadly underappreciated.
Theme #3: Mobility
Under the mobility theme you have the long-term growth potential of electric vehicles and electric batteries, and, as mentioned with self-driving cars above, the need for technology that can monitor their functionality in the world around them. To this end, there is a need to transform tangible data into code.
Taking analogue auto devices such as temperature, speed and pressure gauges, and turning them into digital language is something that Maxim Integrated does. As we demand more and more from our cars, the growth in demand for this type of data is dramatic, and in our view, this is a cheaper way to play the rise of electric and smart vehicles than through electric vehicle manufacturers which are trading at higher valuations. Many regard Maxim as a relatively ‘boring’ stock, but it has a good runway to growth as it has evolved away from its roots into a company that finds and processes solutions within the engineering and electronic sectors.
1 Investment Managers are appointed by BNY Mellon Investment Management EMEA Limited (BNYMIM EMEA), BNY Mellon Fund Management (Luxembourg) S.A. (BNY MFML) or affiliated fund operating companies to undertake portfolio management activities in relation to contracts for products and services entered into by clients with BNYMIM EMEA, BNY MFML or the BNY Mellon funds.
The value of investments can fall. Investors may not get back the amount invested.