Kent Hargis, co-chief investment officer of strategic core equities at Alliance Bernstein, says: “These are the computer hardware manufacturers, payment services firms, cloud computing providers and chip makers that serve as the backbone of the information-based economy and permeate our daily lives.
"While not showy, these reliable stalwarts have sustainable business models and large, recurring revenue streams. Owing to their ability to cushion against big price swings, these higher quality technology enablers outperformed the information technology sector as a whole in 2022.”
Interestingly, figures from Alliance Bernstein show these stocks have a lower sensitivity to the broader market – they are lower beta – than the big tech names.
In fact, roughly one-quarter of the MSCI World index technology stocks have a beta of less than 1.0, putting them in the same universe as traditionally defensive stocks.
Guinness Global Innovators co-manager Matthew Page says while we perceive that certain areas of the tech industry are more defensive than they once were, it is important to distinguish between the three key industries.
He says: “Both the technology hardware and semiconductor industries have historically had greater exposure to business spending cycles.
"However, in areas of the semiconductor industry, these spending cycles are being dampened as businesses make long-term investments into capacity and technological advancement, particularly in the context of secular growth themes such as the cloud transition and development of AI."
Page adds: “Perhaps a more important factor than these long-term secular growth themes is the shift towards ‘as-a-service’ businesses, particularly within the software industry.
"Businesses offering these services are now more exposed to stickier recurring revenues than one-time capex, reducing the cyclicality of their revenues.
"Adobe is a good example, where recurring revenues now account for over 70 per cent of sales, up from 19 per cent in 2011. These revenues are less likely to be cut since they (a) are under longer-term contracts and (b) have a much lower upfront cost than a one-time fee.”
While tech held up well during the past recession, we should also remember it does suffer from a slowdown in the wider economy.
Google and Meta are heavily exposed to advertising spending. Amazon is obviously dependent on how much the consumer has to spend, and Microsoft will suffer if corporates pull back on their IT spending.
It is also a very different story for smaller, unprofitable tech, where many may run out of cash and struggle to fund themselves in recession.
