Technology - as one departs, another arrives

Friday, 24th July 2015 15:35 - by David Harbage

Technology moves fast; for consumers and stock market scrutinizers it can be difficult to keep up. Experience over the past twenty years has taught investors to maintain a close eye on industry developments, company news and sentiment...

The latter being pertinent given the demanding valuations placed on such a ‘jam tomorrow’ sector which typically features more potential than immediate profit.

In the US, announcements this week from PayPal/eBay, Apple and Amazon caught the headline writer’s attention. PayPal stock began NASDAQ dealing on Monday, following its split from eBay, to boast a market worth north of US$50 billion (33 times more than its last listed valuation when eBay acquired the web-based payments business, post its first IPO in 2002). On Tuesday, Apple announced record trading results: featuring a 45% increase in profit to US$10.7 billion on 33% revenue growth in the quarter ended June 2015; but guidance from the creator of the Mac and iphone on the fourth quarter of 2015 quelled enthusiasm in the share price. Yesterday, online business Amazon became the world’s biggest retailer – by reference to market worth of its equity, of US$266 billion, after strong quarterly results propelled the stock 19% higher (up 55% in 2015 to date) – overtaking traditional brick-and-mortar Wal-Mart Stores, which is capitalised at US$234 billion, after a 15% fall this year.    

By contrast with Stateside, the UK’s stock exchange technology sector – be it hardware, software or services - is very small. On Wednesday, our largest listed business ARM Holdings announced very respectable trading results for the first half of 2015, as earnings rose 34% on a 22% increase in turnover. A global leader in semiconductors (develops high tech chips and components used in smartphones including the iphone, tablets and computer sensors and servers); ARM is highly valued by reference to the wider domestic market. Despite retreating from a high of £12 per share in April, the company’s equity currently sits on a PE ratio of 27 times consensus forecast earnings for calendar 2016 and yields less than 1%. But, by contrast with North American technology stocks, the valuation is undemanding and the strong dollar means that the £14.3 billion market cap is not out of reach of a US predator.    

Earlier in the week, the domestic software designer Aveva agreed to merge with (and effectively be taken over by) French group Schneider Electric. A £1.4 billion business, the stock is again very highly rated by reference to earnings (on 27.5 times estimated profits in the year to March 2017) and this in spite of an unexciting outlook for profit progression in the next couple of years. While the company does possess significant attractions in terms of impressive intellectual property (designing oil & gas plants, shipping, power stations), it does appear that Schneider’s management have made an opportunistic approach as Aveva’s stock had been friendless following profit warnings in the Septembers of both 2013 and 2014.

As one technology counter may be leaving, another appears set to take its place as the online payments firm Optimal Payments awaits clearance for its own ‘reverse takeover’ of the European e-wallet business Skrill.  Due by the end of July, a move from AIM to a premium listing and official FTSE250 index mid cap membership could propel this £1.1billion capitalised stock – currently seated in the Support Services, rather than Software & Computer Services, sector - higher. There are only three brokers monitoring the company at present, although a number of big fund managers - including Old Mutual, Fidelity, Blackrock and Franklin Templeton - are keen supporters, and estimates from the sell-side for profit progression next year (+17% to 17.1p earnings per share) appear light for a business which has a demonstrable track record of both organic and acquisitive growth. 

David Harbage                     

24 July 2015