Twenty years ago, the internet phenomenon was taking markets by storm – little did we know it would soon come crashing down. As we reflect on the events of two decades ago, today’s overvalued tech stocks paint a not too dissimilar picture – at first glance. 
The dominance of tech growth companies and the concentration of the market into a few high-flying stocks is reminiscent of the period preceding the dotcom bust. However, underneath appearances, the market landscape has vastly evolved, not least due to the unprecedented accommodative measures from central banks since the 2008 financial crisis.
Amid fears we could see a second iteration of a tech-led crash, our experience the first time around has taught us to always stay one step ahead of the market. By adopting a long-term thematic approach to investing, we can look beyond current market winners to identify the companies of the future.
Same difference?
At the height of the dotcom bubble, the major driver of market sentiment was FOMO – the fear of missing out. Stock market winners were determined by the likes of ‘Queen of the Net’ Marie Meeker and Henry Blodget, head of the Merrill Lynch global internet research team. The IPO (initial public offering) market was vibrant and investors were piling into new listings for the only reason they knew others would – even if these companies often lacked stable cashflow, demonstrable track records or coherent business plans.
Today, we have learned to be more sceptical and requirements for going public are a lot more stringent. However, as IPOs have become exit mechanisms for founders to cash out rather than a means to enable growth, there are fewer reasonably priced alternatives for investors wanting to look beyond the five dominant FAANGs – Facebook, Amazon, Apple, Netflix and Google-parent Alphabet.
Moreover, extreme central bank accommodation since the financial crisis has pushed up valuations across the board. By comparison, leading up to 2000, the narrow concentration of market participants into a few stocks left abundant cheap opportunities elsewhere.
The FAANGs have achieved such market dominance, it is impossible to imagine a new entrant could dislodge them. This is in stark contrast to the situation in the dotcom heyday, where it was easier to compete with market leaders such as Cisco. The FAANGs have developed such sustainable competitive advantages, the only viable threat comes from regulation forcing the companies to dismember component parts – such as Google Maps and Google Search.
Currently, the giants are defying the law of large numbers, with Amazon in line to add $50bn of sales in 2020. Nevertheless, we expect some form of regulation to come into effect in the coming years, and the FAANG dominance is sure to be finite.
Broader lens needed
The biggest mistake we made at the time of the dotcom boom was underestimating the reach of the internet. Everyone was fixated on telecommunications firms, such as Vodafone, thinking these would be the clear winners of the internet roll-out. However, we were so close to the television we were missing the bigger picture – where the internet would become an enabler of innovation across industries.
Indeed, this obsession with the internet and internet providers became ridiculous. I even remember going to meet with a plumbing distributor, where management was questioned on its internet strategy.
Twenty years on from the rise of the internet, the focus has shifted away from pure technology companies – those producing hardware or software – to companies utilising tech for other ends. The world has moved on from being fixated on one theme to being multithemed.
With this in mind, we aim to capitalise on the five long-term secular megatrends we see shaping the global economy – ageing, digitalisation, automation, evolving consumption and climate change. We have a low weighting to big benchmark groups and seek to identify companies able to be successful in another twenty years’ time.
Companies of the future
Beyond just the internet, digitalisation is a multi-decade theme likely to impact the technology space for years to come. Cloud penetration is only at 20 per cent and growing, with every company moving to the cloud. AI machine learning is still in its infancy. Smarter cars are requiring an increasing number of semiconductors. E-commerce is still rising, and online ad spend is growing at about 40 per cent, as targeted adverts become the norm.
One company at the forefront of the digitalisation trend is cloud computing group ServiceNow, which provides workflow automation services. ServiceNow’s offering enables massive cost savings for companies, in some cases allowing them to half their workforce.
Another company likely to be a major tech player over the long term is Splunk, a machine data analytics group producing software for extracting and analysing big data. Splunk’s solution can be particularly useful in the face of hacking threats, allowing companies to instantly detect warning signs across global networks of servers.
Zendesk is another company quickly becoming ubiquitous. The customer software service business creates chatbots for e-commerce websites. These are being adopted across the Fortune 500, as consumers retreating from traditional in-store shopping increasingly seek a personalised experience.
Despite being relative newcomers on the tech scene, all three California-based companies have already made substantial inroads. Indeed, we learned our lesson 20 years ago on the importance of measurable success and only invest where companies have a proven track record.
Jerry Thomas is head of global equities at Sarasin & Partners. The views expressed above are his own and should not be taken as investment advice.