Riding out volatility: global tech's enduring long-term drivers
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Riding out volatility: global tech's enduring long-term drivers

Nov 2022
Aug 2022
Fidelity - global technology takeaways - inflationary and volatile environment

Our thoughts:

Technology adoption and usage are embedded in consumer, business, and public-sector operations and practices — this can’t go backward. Furthermore, many technology business models include recurring revenues, high pricing power, and healthy balance sheets, which are all vital factors to weather a volatile environment.

Global tech takeaways from a recent Silicon Valley bus tour

In this article, originally published by Fidelity in June 2022, portfolio manager Hyun Ho Sohn outlines his takeaways from the ninth Fidelity portfolio manager and analyst trip to the US West Coast to visit technology industry leaders. This was the first of the annual trips since Covid-19, and the team met with 23 companies, including 10 chief executive officers (CEOs) and three billionaire founders. 

The technology sector has witnessed a significant market sell-off over recent months, mainly because of rising inflation, market rotation from growth to value, weakened consumer demand, and supply-chain disruptions. 

While market noise has presented a dark picture, the long-term drivers of the technology sector remain intact.

Key themes discussed during the trip included enhanced demand for digitalisation and automation, deep long-term growth runways for semiconductors, the emergence of new technologies to enhance the cloud transition, and an increasing corporate focus on maintaining profitability through pricing power.

Demand remains strong despite recent volatility

The trip demonstrated that Covid-19 and supply-chain disruptions have actually become catalysts for technology adoption, particularly within digitisation, automation and hybrid working support. 

Companies need to invest in technology to maintain a competitive advantage in hybrid working environments and need to automate processes to reduce supply risks.

Key areas of investment set to benefit include the cloud, security, data analytics and hardware companies providing hybrid working technology. 

For example, Amazon, through their AWS (Amazon Web Services) cloud business, is bullish on the cloud. They view that the value proposition of the cloud resonates even more in hybrid working, a trend that’s expected to stick post-Covid.

Despite the macro headwinds, spending on data centres and the cloud is holding up. Our meeting with Marvell Technology, which develops and produces semiconductors, illustrated a strategic shift of their portfolio away from consumers towards data centres. This limits cyclical consumer exposure, and multiple big customer chip wins should act to ramp up revenue.

Within the semiconductor space, companies look to electric vehicles (EVs) as a key long-term driver for chip demand. Only nearly 10% of global car sales were EVs in 2021, four times the market share in 2019, according to a May 2022 report by the International Energy Agency (IEA). This represents a large runway of growth as the rest of the global car fleet converts. 

Among other sectors, discussions confirmed that AI-powered recommender engines should also offer tangible return on investment for internet companies.

Cyclical slowdown can be seen in some areas

Nevertheless, there are signs of consumer demand weakness. Post-Covid, lockdown beneficiary companies are experiencing pull-in benefit reversal, as the growth of Zoom, e-commerce, and streaming content subscriptions are slowing down from all-time highs. 

This is mainly due to the shift of consumer spending, from technology work-from-home goods and e-commerce, to activity and experience-related services post-Covid. 

Consumer electronic companies have also started to cut orders due to weak demand; consumer electronic demand, which was inflated during the pandemic, has reversed.

New technologies emerging to increase memory bandwidth, compute complexity

Several discussions had illustrated that we are in the early innings of the cloud transition due to networking bandwidth constraints. 

Intel has high conviction on CXL, an exciting new memory interconnect standard that could dramatically increase the memory bandwidth of servers — which is good for chip memory and cloud services — and the compute capability — which is good for chip demand data-centre operators who will be able to offer a new and more powerful customer proposition. 

The technology also runs over existing physical interfaces which should ease and ramp up customer adoption over the next few years.

Supply chains: long-term picture remains positive

On the supply side, conversations during the trip were focused on short-term pain, but with no change to overall long-term supply. 

Supply-chain problems are particularly prevalent within the semiconductor space, with TSMC (Taiwan Semiconductor Manufacturing Company) largely reducing order sizes due to such issues.

Nevertheless, the short-term headwinds will not affect the long-term outlook. Lam Research, for example, shared the view that the global semiconductor industry is expected to grow to $1 trillion by the end of this decade, with capital intensity unlikely to decrease due to the increased complexity of chips required.

Tech firms' earnings and pricing power

Pricing power and strong balance sheets are vital in high inflation and volatile environments. Discussions were focused on companies maintaining margins and profitability through pricing power, which is prevalent in the technology sector.

Semiconductor companies have strong pricing power, as semiconductors are core components of most innovative, new technologies. 

Software businesses often have contracts with CPI (consumer price index) adjustments built into them. 

Furthermore, many technology platforms charge a nominal value (unadjusted for inflation) percentage of all products and services they sell; they can therefore effectively pass on inflation to customers and benefit from higher nominal revenue.

Valuation is leading to attractive opportunities

Given the dislocation and market overreaction around current short-term noise, bottom-up focused active investors have a great opportunity to deliver alpha. Valuations are attractive, and industry-leading technology companies are now trading at low multiples, with no change to their long-term growth profiles. 

Following the conversations at Silicon Valley, with companies such as video-conferencing platform Zoom and customer-service software company Zendesk, I strengthened my conviction on growth software names. 

There are opportunities in leadership software products that are in the early stages of penetration and with open-ended market opportunities, trading on compressed multiples and with no experience of inflated Covid-19 demand. 

I expect increased M&A (merger and acquisition) activity in software, as many smaller firms with desirable assets are now far cheaper given the recent sell-off.


To conclude, conversations in Silicon Valley were positive, and the long-term demand drivers of the technology sector remain intact. 

Technology adoption and usage are embedded in consumer, business, and public-sector operations and practices — this can’t go backward. People still need technology as it provides real value: efficiency, decision making, supply chain planning, and entertainment, to name a few. 

Furthermore, many technology business models include recurring revenues, high pricing power, and healthy balance sheets — all vital factors to weather a volatile environment.

Thinking about the adoption curve for the next three to five years, key opportunities will remain in cloud, data analytics, security, EVs, and factory automation. 

Meeting senior management at investment prospects or current portfolio holdings is an essential part of my investment process. It allows me to get a first-hand account of what companies are doing and planning, and their take on industry developments. Our ninth meeting in Silicon Valley was no exception and I view it as a great success.

This article, which contains Fidelity portfolio manager Hyun Ho Sohn’s takeaways from the team’s annual Silicon Valley bus tour, was originally published by Fidelity on 29 June 2022.

Fidelity International offers world-class investment solutions and retirement expertise to institutions, individuals and their advisors around the globe. As a private company, Fidelity thinks generationally and invests for the long term, which has been at the core of its business for 50 years. The company is responsible for total client assets of US$767.6 billion (as at 31 March 2022) from over 2.83 million customers across Asia-Pacific, Europe, the Middle East, South America, and Canada. It offers a global range of mutual funds, available in various currencies and invested in different asset classes.

Endowus has several funds from Fidelity International, including the Global Technology Fund (available in USD and SGD) and the Global Dividend Fund.

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