Riding the waves of new technology

The FAANGs may capture most of the headlines, but is now the time for younger tech firms to shine?

Article updated: 3 April 2019 10:00am Author: Richard Penny

When talk turns to the investment opportunity in the technology sector, much of the conversation focuses almost exclusively on the famous FAANG stocks. These tech behemoths (Facebook, Apple, Alphabet, Netflix and Google) dominate markets, so much so that the opportunity in smaller, more local players, is often overlooked.

However, with these ‘mega‐cap’ stocks now facing a series of regulatory and political headwinds, younger companies may finally begin to be recognised for the solid investment prospects they offer.

The expansion of technology into the internet of things, big data and artificial intelligence has opened up huge opportunities for companies populating the lower end of the market cap spectrum.

For an investor willing to take a step back from the biggest companies in the market, the UK offers globally‐relevant technology names in growing areas, often at a fraction of the valuation of their US counterparts.

The waves of change

The graph above demonstrates how the ‘waves’ of technological advancement have changed computing and technology over the years. While once mainframe and the Internet were novel, now growth has moved on to artificial intelligence, analytics and smart machines.

Companies themselves will rise and fall as the waves of development shift. First Derivatives, a UK‐based IT service management company, looks well placed to benefit from the growing demand for products that can handle complex data, and process it quickly. Its database product, KX Systems, is the fastest in existence and plays an integral role in complex financial trading systems. Valued at around £635.7m, shares in the company sank more than 50% this year after hitting a high in 2018. Its margins of 20% have been depressed, but by fresh investments rather than slowing sales. Similar businesses in the US trade at far higher prices and First Derivatives, having been hit disproportionately in recent market sell offs, is, in my opinion, currently undervalued.

A new wave

In my view, one of the most promising waves of development is in medical technology.

Here, decreasing costs are helping drive greater development in work to tackle diseases from cancer to Alzheimer’s. The first human genome was sequenced in 2003 costing over $1billion. Today the same process costs around $1,000.

Among the smaller companies at the forefront of the fast‐moving developments in the sector is Maxcyte, a UK‐listed firm and a world leader in gene therapy solutions.

Maxcyte supplies machines critical in the modification of human genes to 20 of the world’s top 25 pharmaceutical companies and has a portfolio of around 70 licencing deals. The investment case also includes Maxcyte’s commitment to undertaking clinical trials to combat ovarian cancer. While a higher‐risk part of the business, it could reap dividends in the future with other similar platforms selling at multiples of Maxcyte’s current valuation.

Long‐term prospects

These are just two examples of the opportunity in UK listed stocks that are more reasonably priced than their US counterparts and offer better long‐term prospects than the popular FAANGs.

The UK may not be at the forefront of investor’s minds when it comes to the technology sector, but the opportunities at the smaller end of the market spectrum offer strong growth, at attractive valuations.

The CRUX UK Special Situations fund has a holding in these companies.

These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees

Richard Penny

Fund Manager

Richard joined CRUX Asset Management in June 2018 from Legal & General Investment Management. Richard had worked at LGIM for 15 years where he had managed the award-winning L&G UK Alpha Trust and L&G UK Special Situations Trust as well as several segregated mandates. Previously he worked at M&G Investment Management, and prior to that Scottish Amicable Investment Management. Richard has a master’s degree in Engineering and Economics from Oxford University.

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