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Why technology stocks are good for the future

Technology companies have been hit with volatility as investors react to the COVID-19 pandemic. Apple has responded to lockdowns in some of its Chinese manufacturing hubs by announcing it will temporarily close stores. On the other hand, tech companies like video-conferencer Zoom have benefited as more people work from home. While short-term performance will remain volatile, over the longer term the IT sector is likely to continue to drive the global economy.

Technology is the engine that powers business and enables the instant communications and connectivity we take for granted. It also has enormous potential to transform how we use resources across other business sectors – with significant benefits to the environment and society.

We believe technology will play a key role in the transition to the renewable-powered economy of the future, and that’s part of the reason our portfolios have an overweight position in the IT sector.

Embracing the cloud

In recent years, there’s been a strong trend away from storing data on in-house servers. Instead, more companies are outsourcing data storage to the cloud which is managed in large data centres, creating a significantly more efficient option than on-premise servers.

The energy used by these data centres is nonetheless substantial and a challenge in its own right. However, some major data centres, including those owned by Apple and Google, are now 100% powered by renewable energy. Meanwhile, Nordic centre DigiPlex has pledged to use waste heat from one of its data centres to warm up to 5,000 apartments in Oslo.

Companies like Microsoft are taking impressive measures to limit their carbon footprints. Rather than just aiming to be carbon neutral, Microsoft is on a pathway to become carbon negative by 2030. The company says that by 2050, it will have removed from the environment “all the carbon the company has emitted either directly or by electrical consumption since it was founded in 1975”.

Saving energy, saving trees

One of the best-known advantages of technology and digital solutions is that they can reduce a company’s reliance on paper. Logging trees to make paper is one of the key causes of deforestation, which impacts on biodiversity and contributes to climate change.

Using digital solutions, like viewing documents online and sending email instead of letters, can help save trees – and therefore our forests, with a flow on effect to our climate. To illustrate, an Argentinian study concluded that producing a four-page direct mail letter and envelope accounts for 25 grams of carbon, even before it is sent. Compare this with email, which is estimated to generate just 4 grams.

Three highlighted technology stocks

At its launch, our new Australian Shares SMA strategy held 5.2% of its portfolio in the IT sector (compared with the benchmark S&P/ASX200 sector weighting to IT of 3.1%). This was represented by one stock, Link Group. An additional 6.8% of the SMA portfolio was represented by Domain Holdings and Seek Ltd, two businesses we categorise as Technology due to their digitally focused businesses but officially sit in the Communications Services and Industrials sectors, respectively.

In line with the broader Australian stock market, these companies’ share prices have been hit hard in recent weeks. However, we believe they remain good long-term investments that provide a positive benefit to society.

Link Group

Link Group provides administration services and digital tools for financial market participants. Their clients are varied and include listed companies (to help manage and communicate with their shareholders), industry funds (to help with membership administration) and lenders (to assist with loan administration).

Under the Australian Ethical Charter, Link Group receives a positive assessment for its technology and administration services because they create more efficient solutions for financial services businesses and their customers.

We also think Link Group is an attractive investment because it is a global business that generates long-term stable cashflows. We also think that the PEXA asset, an online conveyancing platform, is an attractive investment by the company as Australia transitions towards a 100% digital conveyancing process.

Domain

Domain provides residential and commercial property marketing services through its online listings portal. The company’s digital advertising platform is positive under our Charter as an efficient medium of advertising compared to print advertising. Because it also helps people secure housing, Domain attracts a positive adjustment under our Charter.

From an investment point of view, Domain is firmly established as the number two in digital property advertising in Australia behind REA Group. There are structural tailwinds supporting these businesses as property listings continue to flow out of print and into online platforms. We believe Domain has a strong management team backed by Nine’s ownership of the company, healthy cashflows and the potential for higher earnings growth.

Investing for good

We believe investments need to do more than deliver strong financial returns – they also need to generate a positive impact. Used well, technology can help improve efficiency, reduce waste and improve peoples’ lives.

 

Mark Williams is the portfolio manager of Australian Ethical’s Australian Shares SMA strategy. Australian Ethical is a sponsor of Firstlinks. This article is general information and does not consider the circumstances of any investor.

For more articles and papers from Australian Ethical, please click here.

 

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