A little more than a decade ago, the investment universe of the technology sector was composed primarily of personal computers and software companies. However, this has changed dramatically in a relatively short space of time and has generated enormous value creation. 
As large-scale investors, we must grapple with this extremely dynamic industry and also scrutinise lofty valuations in some areas. This is why our annual trip to Silicon Valley – where we meet with top executives of the leading tech firms – is hugely valuable for deepening insights into our investments in the sector.
A chief objective of these trips is to identify the long-term secular forces at work. These need to be distinguished from the short-term cyclical swings that may lead to profits or losses in a given quarter but tell us little about a company’s potential to generate long term wealth for shareholders. Among the long-term factors we believe will continue to drive the sector are the expansion of media platforms, the rise of artificial intelligence and the increasing potential of the cloud.
The growth of media platforms
When we met with Facebook – including three of the divisional executives and Sheryl Sandberg – much of the discussion was around regulation and putting controls in place. We were able to gain more appreciation for the process, in terms of internal operations and how it is interacting with external constituents to get where it needs to be. Clearly, it needs to address these issues, but we feel it understood and was actively tackling these issues.
Outside of this, we felt encouraged. There is a significant amount of work going on behind the scenes with more monetisation of activities. Listening to the Instagram executive on Insta video, IGTV, monetising the ephemeral nature of Instagram Stories, as well as the associated personalisation, gave us a much better sense of what is possible down the track. A meeting with the head of advertising also suggested Stories could be a game changer. Top-line growth was not likely to slow and there is a chance we may even be talking about acceleration in a year or so.
Another key highlight was the technology led rise in the scale and scope of the leading companies, allowing them to expand across industries and national borders. Netflix is a great example. It has become the largest video company in history – largely because its reach is unconstrained by infrastructure. This provides a key advantage over other firms that need to lay cables or set up broadcast towers. International expansion has allowed Netflix to spread the cost of high quality programming among a global subscriber base.
Rise of machine learning and AI
Machine learning and AI are the key themes for the next decade and beyond, with platform companies are the best placed to benefit. However, this may be an area of ongoing conflict between the US and China, as the countries race for global leadership.
Analysing customer preferences is an example of innovation reshaping the economy. AI relies on powerful computing resources, which are now available to many firms through cloud computing services such as Alicloud, AWS and Azure. But providing computers with the information needed to make decisions and perform tasks without human intervention – the branch of AI known as machine learning – also requires vast amounts of data. This is one reason the biggest tech companies and internet platforms are taking the lead in developing machine learning-based artificial intelligence (AI).
A theoretical topic for years, we are now starting to see real fundamental impact on company business models from AI use cases. Workday is a cloud-based provider of HR software. Unlike the static software competitors install on a company’s servers, Workday’s product is constantly learning and its experience with millions of employee records means it can now predict which workers are in danger of growing dissatisfied. In our meeting, we had a real sense of the strength and durability of its cash flow. It was also apparent how powerful its analytics capabilities had become and the improved value-add to the customer.
The importance of the cloud
In nearly every meeting, companies talked about the importance of the cloud. In recent years, we have seen a transformation in the way businesses collect and deploy information. Key to recent changes have been constantly updated cloud-based software systems, which allow companies to integrate information in new ways. While the impact of this change is perhaps most visible to consumers in the rise of online retailing, it is also touching other industries. We may even be on the cusp of financial companies moving data into the cloud.
Salesforce.com is at the leading edge of this transformation. Salesforce’s customer relationship management system, offered by subscription over the internet, allows companies to not only maintain records on current customers, but also to identify new prospects. Data then flows into revenue forecasts, inventory management and other parts of the enterprise.
Scott Berg is portfolio manager of the T. Rowe Price Global Growth Equity fund. The views expressed above are his own and should not be taken as investment advice.