Tech is a no brainer for investors.
But a simple investment theme for the sector is being badly executed. Investors are too narrow in their focus, chasing Nasdaq and FANG (Facebook, Amazon, Netflix and Google) stocks, in a similar way to how they tend to play emerging markets. That is, in a simple fashion.
Investor sentiment is cautious, except when it comes to tech stocks – even a scandal doesnt hurt for long.
The scale of the Facebook data privacy issue is still being uncovered, with new revelations about information shared with Huawei, a Chinese company that some American politicians and regulators want banned from government contracts because of national security concerns.
But Facebooks stock continues to trade around records.
Apple recently got handsomely rewarded for making sense of tech disruption, its market value soaring close to a trillion dollars as it embedded all of the themes – big data, artificial intelligence (AI), augmented reality (AR), the internet of things, and enhanced security – under the hood of its newest iPhone.
The problem is that the market now considers tech stocks a defensive play.
How did a growth sector, trading around eye-watering valuations thanks to crowding, suddenly become defensive?
Has everyone forgotten it also sold off in the February meltdown, and again in March?
After attending three of Europes biggest tech conferences – Web Summit, Mobile World Congress, and Viva Technology – I will admit that the themes are challenging, and there is a lot of noise thanks to startups pitching.
At Web Summit in November, it seemed big companies were bamboozled by blockchain, AI, AR, virtual reality, big data, the internet of things and fintech, with the real possibility that the Amazon effect would decimate companies.
Fast forward six months and the c-suite is tackling digital transformation.
Companies are exploring tech themes all at once, and chief financial officers are allocating money to once radical ideas. Some are even willing to write off entire investments that fail, putting it down to a learning exercise – similar to startups.
Entrepreneurs are having their ideas commercialised and big companies are bringing innovation to customers faster through partnerships with startups – rather than embarking on expensive acquisitions or relying on in-house tech teams innovating from scratch.
Digital transformation looks like it has picked up speed, reducing the likelihood of companies being displaced by the dreaded Amazon effect.
Investors believe tech can tackle costs, but fail to value the revenue potential.
At Viva Technology last month, one French company told me that innovation has expanded margins.
New revenue lines are emerging as even basic items like a hairbrush, shower head, and tape measure are reinvented.
Market participants are lazy, overlooking the potential for tech to drive earnings at traditional companies, investing only if the company has an obvious tech label.
So what to look for in the future? Good management will count more than ever, as leaders need to be visionaries to chase tech-driven revenue.
Its a different era to maximising balance sheet potential and utilising cheap money to do deals.
£ Karen Tso is an anchor on Squawk Box Europe, CNBC. Follow her on Twitter @cnbckaren.