The recent Deliveroo IPO hit the headlines for all the wrong reasons, such as an excessive valuation, a lack of profits and the questionable treatment of its workers.
But another feature of the company that made some analysts uneasy, but received much less press coverage, was its description as a “tech” stock.
While Deliveroo relies heavily on technology, it is difficult to find a company now that doesn’t. It is a food-delivery business, facing competition from many similar companies in its sector, meaning it does not have the kind of economic moat that can justify the wild valuations placed on the US tech giants, for example.
Is the tech umbrella then too broad, and has this created an issue of ‘techwashing’ in the investment industry?
Trustnet spoke to two technology fund managers for their thoughts on the subject.
Enabler or adopter?
Robin Geffen, manager of the Liontrust Global Technology fund, said the “technology tent” is definitely becoming overcrowded, with companies who hope to be rated like fast-growing tech stocks trying to “elbow their way in”.
As such, he has two broad definitions of what constitutes a technology company: it is either an enabler or an adopter.
“An enabler produces new technology to help other companies boost productivity and help grow their business,” he said. “These technology companies provide essential tools for businesses, just like the companies that made pickaxes and shovels during the Gold Rush era.”
As an example of an enabler, he referred to long-term holding Twilio, which provides a communication API (Application Programming Interface) platform – a software intermediary that allows two applications to talk to each other – for developers.
“If you’ve received a text, call or email from a company through an app or webpage, it is likely that it used a Twilio plug-in solution,” he said.
“With the rising need for an online/virtual presence for all businesses, Twilio stands to benefit by providing the necessary tools that developers need to be able to provide this service.”
Contrastingly, Geffen defined an adopter as a company that develops and utilises its own technology to gain an edge in its chosen market.
He cited Visa as an example of this, having built its own systems within the payments space.
“Visa has developed very high-quality ‘rails’ with a processing power and back-up security that maybe even exceeds the US government’s own systems,” said Geffen.
“Both enablers and adopters have a strong science and intellectual property moat around their businesses,” he added.
“Some mega-cap companies span both, such as Amazon, for which its cloud-computing provider AWS is a great enabler and its seller platform Marketplace is a great adopter.”
Is EV the new PC?
Walter Price, lead portfolio manager of the Allianz Technology Trust, began by likening the current enthusiasm around electric vehicles to the PC boom in the 1990s.
He said: “When we think of tech companies, we define them as where tech is driving their growth and creating a competitive moat.
“There are certainly many tech companies where there is growth, such as the 400 PC companies that were created during the PC boom in the 1990s or the hundreds of solar-cell companies in the early 2000s.
“However, these provided no durable return for investors unless they had a competitive moat,” Price added. “And most did not.”
He explained there is a similar situation going on in electric vehicles now, where there are dozens of new companies attempting to attract new customers.
“One aspect we look for is a competitive moat that can translate that revenue growth into growing profits and cash flow,” Price added.
“That is why we gravitate to the leaders in a category, because the leaders make most of the money.”
He said he also prefers high growth rates from a product or service that provides a new way of doing things, or does so at a much lower cost than previous alternatives.
“We also like revenues that reoccur from services or subscriptions, because that aligns the company with its customers and builds durable shareholder value,” the manager continued.
“There are many tech companies but not so many great ones,” he finished. “It is our charter to find and own the great ones.”