Tectonic: Taking stock of a quarter century of technology transformation

In the 25 years since the Fidelity Funds – Global Technology Fund was launched, there have been tectonic shifts in the technology landscape. Through these shifts, Fidelity’s strong proprietary research and access to industry specialist resources has allowed us - and continues to allow us – to form what we believe is a deeper, more nuanced take on opportunities and challenges, as we look to sort the fundamentals from the noise.

By Hyun Ho Sohn, Portfolio Manager

I am immensely proud to have served as the Portfolio Manager, Fidelity Funds – Global Technology Fund (the Fund) since 2013 and to have worked as a part of a team of talented technology analysts that have provided me with visibility and insight across this truly global, diverse and constantly evolving opportunity set.

The Fund reached its 25th anniversary in September 2024 and the achievements of the Fund are the achievements of our broader team of analysts and technology portfolio managers, both current and past.

I wanted to take the opportunity of this milestone to reflect on some of the shifts we have seen in the technology landscape over the past quarter century. Longer-term perspectives can be beneficial, especially through periods of market volatility. As I have said before, whilst much of the market can fixate on selloffs, market rotations and shortterm earnings, or be driven by the unwinding of crowded trades and other technical factors, those taking a longerterm view can capitalise on the opportunity to invest in companies with durable, long-term earnings potential.

Many of the key technology developments – or at least the products and businesses they have enabled – over the past 25 years are already well-known, mainly because they have disrupted and re-shaped our everyday lives and collective experience. Internet and then smartphone adoption, the rise of e-commerce platforms, the monetisation of search, the shift to cloud computing, the exponential increase in computing power, the rise of video gaming and streaming and, more recently, Artificial Intelligence (AI) have step-changed the way we interact with the world around us and each other.

Fidelity’s dedicated technology analysts have been working across the space for decades and have been witness to these themes in real time.

Alongside the step changes in technologies, there has equally been a tectonic shift in the investment case for technology. At the start of the new millennium in 2000, some were already arguing that we were beginning a paradigm shift which would play out in the next few decades. However, we were early in the cycle. The S&P IT index forward price-to-earnings (P/E) peaked on 16 March 2000 at around 50 times, a reflection of both investor confidence on price, but also the nascent nature of underlying markets and thin or even aspirational earnings at that point. In 2000, the global internet population was around 0.4 billion people.

Fast forward to 2024. The S&P IT index forward P/E stood at around 29 times at 31 August 2024, but with the foundation of a significantly stronger earnings underpin than 2000, lowering the multiple. The global internet population was around 5.45 billion people at 30 June 2024 and we have collectively lived through a global pandemic which broke almost every offline habit. Practically every market and every value chain has been, or is being, remade around technology and the internet.

These headline numbers are indicative of broader lessons from the past quarter century. First, as the chart below shows, the growth in global tech market value has outpaced the growth in global market value as a whole over the quarter century to end August 2024.

Source: Refinitiv DataStream, August 2024. Past performance is not a reliable indicator of future returns.

The tech sector continues to evolve and is now an essential component of all other sectors, consumer lives and corporate digitalisation supplying the core infrastructure that consumers, businesses, and governments need to operate. It is a platform service that supports every industry and is not a “nice-to-have”, but an essential component needed to compete. The importance of tech as a platform business, is allowing tech companies to develop recurring revenue streams. Tech providers are moving to subscription models that better ensure ongoing, repeat customers, enabling more stable margins and consistent growth. These companies are effectively monetising engagement, and as long as people continue to use technology, demand will stay resilient.

Second, while it is tempting to call out tech milestones over the past quarter century as if they were sequential, in practice they have been cumulative, and we are investing at the intersection of many converging technologies and businesses.

Third – and this core to my own investment philosophy and approach – tech is not just about a narrow concentration of primarily US Big Tech companies. Investible technology themes are pervasive, multi-faceted and structurally linked to business competitiveness globally across a range of sectors, industries, geographies and market caps.

For example, think of the integration of technology into industrial processes or financial companies’ payments infrastructure. Platforms have changed significantly with the use of smartphones, smart devices and Internet of Things (IoT) technology. Even in areas which people might consider well-penetrated by technology, there is plenty more scope for rollout into new consumer areas. New businesses and platforms have emerged, which – along with new devices – have started to shape consumption and our leisure and work lives in new ways.

There is an increasing range of industry-leading, non-US tech companies – that generally sell at lower multiples compared to the more widely covered US region – set to capitalise on these trends. Examples include ASML (Netherlands, Semiconductor equipment), SAP (Germany, Application Software) Amadeus IT (Spain, Travel-related IT), TSMC (Taiwan, Semiconductors) and Alibaba (China, Broadline retail). These ex-US opportunities span a range of industries across the technology space and are fertile ground for research insights.

Fourth, mega cap stocks tend to be well-researched and can often be richly valued and – as we are seeing currently – capable of creating concentration risk. The “winners” always look invulnerable, until they don’t. Routinely over the past quarter century, small and mid-cap companies with strong proprietary intellectual property have offered the potential for outsize gains on mergers and acquisitions (M&A) take-out, Initial Public Offerings (IPO) or other exit from diverse sources.

Small and mid-cap companies can reap M&A benefits – illustrative examples from the Fund (2014-2024) and deal sizes.

Source: Fidelity International, August 2024. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. Past performance is not a reliable indicator of future returns.

We believe that the foundation for uncovering non-obvious, diversifying tech-related returns, throughout the past quarter century – and on an ongoing basis – is research excellence.

That excellence is derived from many components – subject matter expertise on new and emerging technologies, but also a solid read on company fundamentals, including finding competitive moats that are not already fully priced in, valuation discipline on entry and clear line of sight on monetisation/sustainable revenue generation.

Alongside a deep read, breadth of insight is key. Tech is a place of convergence, so seeing opportunities across geographies, sectors and platforms is critical. To do that, you need breadth of coverage and extensive relationships measured in decades, not months or even years. You also need access to C-Suite and senior leadership globally and a from-the ground understanding of cultural and regulatory context, ever more so given the increasing influence of geopolitics on global technology.

At Fidelity, our technology-focused portfolio management teams are supported by a closely-knit team of technology investors – 26 technology, media and telecom sector analysts, together with analysts covering other sectors also adding value in a converged environment. Our proprietary research network across Europe, North America and Asia provides local expertise in identifying various technology hubs, such as the semiconductor/manufacturing hubs around Shenzhen, Taiwan and Korea, as well as the programming, entrepreneurship and venture capitalist ecosystem within Silicon Valley. This knowledge allows us to build relationships across the lifecycle of businesses enables us to form a view on emerging technologies and, as potential competitive intensity increases, we can follow the venture capital funding.

We are bound to see further tectonic shifts in the technology landscape over the years and decades to come. Given the disruptive nature of innovation in the technology - technology cycles are often noisier than in other sectors, with sometimes rapid deviations from consensus. The market can underappreciate the exponential growth potential over time of new technology winners. Similarly, mature technologies can be excessively discounted by the market due to news flow on newer technologies, creating opportunities to buy stocks with strong fundamentals at attractive valuations.

The need to differentiate between “reality” and “hype” across the sector is a constant and requires complex analysis. As long-term investors, we always seek to combine multi-cycle thinking and an understanding of big picture implications with a bottom-up understanding of what is happening at the ground level of adoption. Ultimately, it is our strong proprietary research and access to industry specialist resources that allow us to form - what we believe - is a deeper, more nuanced take on opportunities and challenges, as we look to sort the wheat from the chaff, or rather the fundamentals from the noise.

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