Five Lessons From 25 Years In The Tech Sector by Paul Wick, Columbia Threadneedle Investments
Paul Wick has been investing in the tech sector longer than any other current portfolio manager of a U.S. technology fund. Back in 1990, when he started in the sector, Motorola had just introduced its flip phone, Apple had recently rolled out its beige box Mac Classic personal computer, and there were a lot of major subsectors that barely exist today – companies making UNIX computers and tape drives. Wick has witnessed revolutionary change as hundreds of network, PC, cell phone, software, video game, and Internet waves washed over the public markets.
Having lived through the internet bubble, Wick is critical of the hype that attaches itself to new technologies. “There are a lot of companies that are a flash in the pan in tech, and it is important to identify businesses that won’t fizzle out.” For Wick, growth at a reasonable price has always been a top priority. “We look at a lot of aspects of a company, including its products, management strength, competition, supply chain, and manufacturing, but we also have an emphasis on not overpaying. Intellectual property is a really important thing – it enables long-term, sustainable, high-profit margins.”
We asked Paul to reflect on his experience investing in the tech sector and share his thoughts on the direction of the tech industry in the coming years.
What are some of the game changers you have seen over the past 25 years?
The introduction of the personal computer in the late 1980s/early 1990s was akin to what we are seeing in smart phones now. Dell and Gateway were great beneficiaries here, along with Intel. This was followed by the trend of networking PCs together, which benefitted companies like Novell and Cisco. Data networking became a new category, and that gave rise to client server computing – software loaded into a central server and accessed via networks. Netscape’s IPO in 1995 helped broaden the public’s access to web browsers, which gave rise to widespread access to the Internet. Of course, more recently there is the smart phone/mobility revolution, along with cloud-based computing. All of these advances required faster, more powerful, and frequently smaller semiconductors.
What are some of the trends you currently like in the tech sector?
I think that biometrics will continue to expand as more and more of our devices “recognize” us. I also think the Internet of Things – the proliferation of objects connected to the Internet– is at the beginning of a long growth period as cars are outfitted with 3G and 4G capabilities and appliances and household objects increasingly talk to each other. I think that aspects of the Sharing Economy have promise. There have also been developments in chip design that are facilitating more powerful and energy efficient semiconductors. I think that we will see consolidation in the chip sector continue as the industry matures. I remain cautious of consumer Internet companies, as I wonder how many of them have real staying power.
What are some of the major lessons you have learned as an investor in the tech sector?
- Being successful in tech is not just about being first to the next big thing. It’s more important to find long-term trends with legs. The PC trend, the networking trend, the smart phone trend – these are all long-term drivers that unfold over many years. Green energy, alternative energy and fuel cells have floundered for a long time. Everyone remembers an IPO like Google’s, and the stories of stocks that go straight up, but the much more common pattern is for companies to flame out after their IPO. It can take a year or more to understand if a trend is going to accelerate and dominate, and to understand the players in that space. Google was the exception: they went public and just kept going. Facebook is a good example of how rocky the first few quarters can be.
- It’s important to recognize when accepted wisdom is no longer relevant. As industries mature, the dynamics change. There used to be a rule that any time the semi industry saw year-over-year revenue growth above 40%, or saw unit growth in excess of 25%, the industry would go into recession within six months. These numbers made sense in the days when rapid growth in PCs was driving 65% of semi demand, and every chip company had its own fabrication plant and added capacity or hit the brakes at the same time. Now, with dedicated foundries like Taiwan Semiconductor Manufacturing, capacity adds are more granular, and cyclicality has diminished. It’s unlikely that we will see the type of unit growth or revenue numbers that we had in early days. Instead, we have a chip industry diversified among far more end markets, particularly cell phones, connected TVs, automotive electronics, industrial robots, and wearable electronics. Supply chain systems are better, the volatility of demand is lower, and supply growth is more restrained, so there aren’t the boom-and-bust cycles that we once had. Understanding these new dynamics is much more important than trying to apply the old rule. There are similar “absolutes” in other industries that have become less reliable as the industry matured.
- Business models matter. We have always been suspicious of questionable business models. We focus on finding companies with strong intellectual property, a sticky customer base, and pricing power. We want to see recurring revenue and free cash flow generation.
- Assemble a team that balances investing skill with technical know-how. Everyone on my team has significant investment experience, but many of them also have their roots in the tech industry, working in computer networking or as semiconductor engineers. They know electronics better than my earlier analysts – understanding the architecture of smart phones and the process development aspects of fabricating semis. This allows them to understand which companies will benefit from a new development in semi manufacturing, for example. It’s a terrific advantage.
- Valuation is important, but it is also important not be dogmatic. Experiencing the bubble made me too cautious on some of the Internet names, and some of our competitors outperformed us here. We missed investing in companies like eBay, Priceline and Amazon.com at the bottom in 2002 because we never liked the valuation. As a team, we all have a hard time looking out and saying “I am comfortable that no one will be able to compete effectively with Tesla, or that Zillow will have 40% in operating margins in four years.” Yet these stocks are priced as if that is a slam dunk. Valuations in software have gotten higher, and acquirers are comfortable paying more for a company because they think they can gain efficiencies quickly. We need to be sure to keep our valuation yardsticks current.
My approach to investing hasn’t changed much, even if the tech sector has. I come at this as an investor rather than a technologist. I took one computer science class my freshman year of college and didn’t enjoy it very much. In contrast, investing in technology all these years has been both an exciting challenge and great fun. It’s hard to believe all of the change that has happened in the past 25 years.