[TOP STORY] Anchor Capital sifts through the tech wreckage of 2022
SIMON BROWN: I chat with David Gibb, fund manager at Anchor Capital. David, I appreciate your time today. You and your colleagues posted a note last week on technology. I want to delve into some details. Towards the end, you argued that in 2021 your vision is adjusting to risk. In 2022, your theme for tech investing sifted through wreckage, and there have been wrecks even in big tech.
DAVID GIB: Yes absolutely. We try to have a theme for each year. We defined this theme in January, so it’s not something you do in hindsight. But last year there was definitely this idea of taking certain risks off the table. There was lots of speculative activity, lots of interest from retail investors, strong action in cryptocurrencies – and obviously zero interest rates.
We went from that to this year, where we have this inflation surprise, and we had another big surprise on Friday where the number was ahead of what people were looking for. So we really went from adjusting for risk, in our view, to looking at the wreckage. The first part of the wreckage that we saw was really about deficit technology, and it started last year when people decided not to take any risks – so anything looking to the future, a big promise of many companies on what they would produce in the coming years, but where there is no revenue.
So these companies were extremely hard hit and it really reminds us of 2000 when we had the internet tech bubble and then 2008 when many stocks were at 65% or even over 90%.
But what we’ve seen, I really think in the second quarter, is a big hit for some of the large-cap tech stocks. Thus, companies like Amazon had a very difficult second quarter; the stock price is quite low. And now we also see weaknesses seeping into Alphabet, Apple and Microsoft.
The big laggards this year in big-cap tech have been many companies that were real beneficiaries of Covid, and those would be things like Amazon, streaming companies like Netflix.
Then we obviously also had issues with Meta, with Facebook – partly because of Covid but also because of TikTok and Apple’s privacy changes.
So generally the sweetness is felt in e-commerce, streaming and online advertising. But we haven’t yet seen earnings adjustments for many other companies like Apple and Microsoft, so we’re waiting to see if we have any downward revisions there.
SIMON BROWN: Yes. Looking at the company charts you posted (see below) in terms of 3-month-to-date 12-month performance, Netflix, [has been] the absolute star in terms of loss. But if we look at the Facebooks, the Apples, the Amazons, the Microsoft Alphabets, I appreciate that some of the Covid boom is now behind them and some of that push ahead remains. Some of them also fade. What about regulatory issues? There’s definitely a bit around Meta, a bit around Amazon, even Google – but not really Microsoft.
FAANGM stock performance in 2022, % change
DAVID GIB: Look, Microsoft got through its regulatory issues just over 20 years ago. That was around 2000. In some ways, Microsoft is sort of sidelined in terms of regulation because it’s been there. Listen, Microsoft is definitely doing things it shouldn’t be doing. I mean, they’ve recently come under scrutiny from the European Union for locking people into some of their cloud contracts. So they have a slightly different approach now. Their legal manager, Brad Smith, said: “I’m sorry for what we did, but we will adjust our behavior.
But I think the companies that have generated the most anger are generally Amazon, Meta and Alphabet. There is no doubt that Europe has tended to take the lead in regulatory action, so we are awaiting the Digital Markets Act and the Digital Services Act, which are two bills that have passed in Europe.
Read: Meta, Google and Twitter pledge to better fight fake news as EU toughens
They come into force in 2023 and 2024 respectively – the DMA and the DSA. Then what tends to happen is that other countries have followed the European lead and I think now with the Biden administration there’s a lot of interaction between regulators in the United States and in Europe. So we’re also seeing a lot more progress in the United States, and there are bills that are being worked through in Congress.
One in particular, the US Online Innovation and Choice Act — which is really how you deal with platform companies and their anti-competitive behavior — is making its way through Congress. Obviously, there’s a lot of backlash from large-cap tech. But I think the regulations are being presented to us in the EU and other countries like Australia, even Japan and I think it’s on the way in the US. We don’t want to lose sight of that.
SIMON BROWN: Let’s go quickly to China. In fact, I saw charts over the weekend that showed Chinese big tech listed on Hang Seng, sometimes listed in New York, generally doing better than the US. We have the likes of Alibaba, which actually bounced off the dips quite strongly. We have information that DiDi will be allowed to register again and will therefore be open to new customers. There were 60 games approved by authorities last week, but none for Tencent. Is this perhaps – I don’t mean the end of the Chinese bottleneck on tech stocks, because that would be dangerous – but a glimmer and perhaps an opportunity?
DAVID GIB: Maybe. I think China has been, as we describe it, like a purgatory, really, for international investors, especially in technology. With so much control now vested in the president, he might change his mind about some things. So it’s difficult. I think the point we like to make is that pragmatism is no longer the main driver of these decisions in China. Historically, under previous leaders, growth came before politics. This has changed now, which has made the situation more unpredictable.
But going back to the comment about Alibaba actually doing better than all the major US tech companies this year, it’s really a grassroots discussion. The base was so low. And if you kind of went out and did a sum of the parts on Alibaba, and gave a value for Alibaba Cloud, which is the leader in China, you end up with a PE about 10 times on their sale online retail business in China. It’s just re-evaluated by, say, 10 times to 15 times over the last two weeks. The share has therefore increased by more than 40% in the last few weeks alone. I think it’s become a valuable technology, and it’s done well this year, much like Hewlett Packard or IBM did well this year. The same would be true for Tencent. The multiple was so low that it didn’t do as well as Alibaba this year, but it’s definitely a valuable tech situation.
I think the other thing is that inflation is much lower in China. The latest reading was just above 2%, compared to 8.6% in the United States. So there is plenty of room for stimulus, although China has obviously been reluctant to come with too much stimulus, in part because the Covid situation there is not completely under control.
SIMON BROWN: One last quick question. The watchword, words perhaps – prudence and profitability perhaps, two points.
DAVID GIB: Yes, absolutely, Simon. We are aware of the sustainability of the company’s results. It’s definitely an engine, so we have to be careful with downgrades. So try to invest in areas where you think income is more secure.
SIMON BROWN: We will leave it there. David Gibb, fund manager at Anchor Capital, I appreciate the time.