Rotating Back to Tech
Alphabet

Rotating Back to Tech

Professional investors are rotating back into big capitalization technology shares. This was inevitable. Giant tech platforms are both profitable and especially disruptive.

One of the best examples to illustrate my point is what we’re currently seeing with NVIDIA Corp. (Nasdaq: NVDA). Shares rallied on Monday to a record new high after managers revealed next-generation CPUs for data centers. The lineup will challenge legacy suppliers like Intel Corp. (Nasdaq: INTC) and Advanced Micro Devices, Inc. (Nasdaq: AMD).


 

There is a larger problem, though, for NVIDIA. The company is emblematic of the bright line being drawn between large, truly disruptive companies and all of the rest. While many tech stocks have floundered since February, the shares of Microsoft Corp. (Nasdaq: MSFT), Amazon.com, Inc. (Nasdaq: AMZN), Facebook, Inc. (Nasdaq: FB), Alphabet Inc. (Nasdaq: GOOGL) and NVIDIA have surged, in most cases, to record new highs.

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Some of this is due to nervous professionals seeking more liquidity, but there’s another factor at work: Managers at the big-tech platforms are not behaving like incumbents. They’re not playing it safe by any means. They are wielding their scale, platform advantages and access to cheap capital right now to shape the future of tech for the next several decades.

While NVIDIA managers were launching chips on Monday that will surely hurt future profitability at Intel, Microsoft chieftains were fielding calls about the $16-billion acquisition of Nuance Communications, Inc. (Nasdaq: NUAN), a business that builds artificial intelligence (AI) speech recognition software used by corporations to transcribe spoken language.

The implication is clear: Big tech platforms are taking dead aim at legacy tech architectures and the way software features are delivered to enterprise customers.

NVIDIA’s new CPUs will dispense with the 40-year-old Intel x86 chip architecture in favor of power-sipping designs from ARM Holdings plc (ARM.F). And Microsoft will soon be in a position to bundle cutting-edge speech recognition features with its core Azure cloud-computing business. These are big competitive advantages.

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Investors are taking note. While the shares of the big platforms race higher, the stocks of smaller businesses have been left behind.

Some examples of these lagging stocks that investors should keep their eyes on include Appian Corp. (Nasdaq: APPN), SailPoint Technologies Holdings, Inc. (NYSE: SAIL) and Magnite, Inc. (Nasdaq: MGNI).

To be clear, these companies aren’t lagging because they’re not broken. They could very well report strong financial results in the weeks ahead. My concern at this stage is price/earnings multiple compression — the idea that investors will be willing to pay less for growth given the prowess of the larger platforms.

The rotation back into tech was inevitable, and savvy investors should consider playing the trend.

Best wishes,

Jon D. Markman

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