So what’s happening with the growth versus value debate? Is long-lasting inflation still a worry?
The market has been grappling with those questions all year, and we’re no closer to any answers as July quickly runs out.
But what if there were stocks that were both growth and value? Wouldn’t that save investors immense headaches from trying to predict inflation and interest rates?
According to Montaka chief investment officer Andrew Macken, the answer was right in front of us the whole time.
“There is no doubt that the world’s annual $120 trillion economy increasingly depends on just 6 mega-tech businesses to function properly,” he wrote on a company blog.
“You would think they would continue to all be obvious inclusions in portfolios.”
The businesses he refers to are Alphabet Inc (NASDAQ: GOOGL), Microsoft Corporation (NASDAQ: MSFT), Amazon.com, Inc. (NASDAQ: AMZN), Facebook Inc (NASDAQ: FB), Tencent Holdings Ltd (HKG: 0700) and Alibaba Group Holding Ltd (NYSE: BABA).
“Investors shouldn’t rotate out of mega-tech to value because mega-tech are value,” said Macken.
“For the patient investor who can look through the short-term noise, the rewards will be substantial.”
Haven’t tech shares had a pretty good run already?
Macken acknowledged many investors would think the massive technology companies have already had their big run.
“After a strong 2020, many investors are worried all the ‘easy money has been made’ – a commonly used phrase we hear in our industry (which also suffers from acute hindsight bias).”
Investors are also worried about higher interest rates, he admitted, and the compression on earnings multiples that would have on growth stocks.
Then there are the qualitative worries.
“Mega-tech investments also seem boring now – a surprisingly strong criterion some investors seek to avoid,” Macken said.
“And, of course, there are the never-ending headlines pointing to regulatory pressures across the sector.”
But contrary to perception, technology shares have underperformed this year so far, according to Macken.
“Our analysis shows that mega-tech stocks not only offer some of the best growth opportunities, but also offer some of the best ‘value’ opportunities in the market today,” he said.
“We see material upside in all 6 of these mega technology businesses. Given the combination of strong and growing advantages, enormous growth opportunities, and material undervaluation today, we believe these names should form – or continue to form – the core of any global equities portfolio.”
Macken cited 3 reasons why he thinks these massive companies should be counted as value.
Mega-techs are the best businesses in human history
The fund manager is glowing about the quality of the ‘big 6’ tech shares.
“The business quality of today’s mega-techs is among the highest that humans have ever created,” he said.
“They dominate global data, benefit from enormous ecosystems, and have superior economics and scale.”
The massive cash flows the mega-caps make can be ploughed back into the business to search for new opportunities.
“These mega-techs all have a vast array of high-probability growth options in enormous new TAMs (total addressable markets).”
He took cloud computing as an example.
“For the leading cloud providers, their advantages in scale, data and customer captivity will only continue to strengthen over time,” said Macken.
“Said another way, this is a space for which enormous growth is largely assured and for which the winners have already been defined today. This means that the future revenues and earnings power of these businesses will also be multiple of their current levels.”
Inflation worries are overblown
Macken simply doesn’t share in the fears of other investors when it comes to the prospect of higher inflation.
“While we note the same strong headline inflation numbers as everyone else, we struggle to see an extended acceleration in core inflation,” he said.
“We… expect structural disinflationary forces – such as aging populations, labour-disrupting automation technologies and global corporate and government indebtedness – to persist for decades.”
Besides, even if prices went up, these 6 giants could have enough market power to simply charge more.
“We believe the latent pricing power in these businesses is likely very strong – and in some cases, extraordinarily so,” he said.
“Take Microsoft 365, for example… This costs just US$32/month, vastly below any reasonable estimate for the value it adds, strongly supporting our latent pricing power hypothesis.”
Current valuations for these tech shares are underdone
Macken’s team has calculated that future expectations priced into the current tech shares are too conservative.
He took the example of the 3 US players that provide cloud infrastructure. Consensus estimates for their collective cloud revenues by 2030 are “in the order of just US$650 billion” more than current levels.
“This is a tiny fraction of the US$8 trillion increment that Microsoft CEO Nadella expects to accrue to the tech space over the next decade,” said Macken.
“If Nadella’s forecast above is even remotely accurate, then these cloud providers will see much higher revenues (and earnings) in 2030 than what is currently being implied by consensus estimates.”
And the valuation of Facebook alone, with a forward price-to-earnings ratio of just 14, has Macken absolutely puzzled.
“Some of the businesses trading at a higher multiple than this today include Australia’s Wesfarmers Ltd (ASX: WES), Scentre Group (ASX: SCG), and plumbing parts supplier, Reece Ltd (ASX: REH),” he said.
“At the current stock price, the market is effectively giving investors all of the upside from eCommerce, the monetisation of the creator economy, WhatsApp, Messenger and Reels, as well as Facebook’s growth in VR/AR for free!”