Tech sector to see ‘powerful acceleration’ on earnings growth post Covid-19 — Franklin Templeton

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Kuala Lumpur, 23 June 2020 – Technology sector will see “powerful acceleration” growth in both revenue and earnings, according to Franklin Templeton Investments.

“Once we get through this crisis, we’re going to start seeing very powerful acceleration, not only in revenue but in earnings for this sector,” said Jonathan Curtis, vice-president of Franklin Equity Group at Franklin Templeton Investments, in “Tech Sector in the Post Pandemic World” webinar session today.

“Investors are so positive about this sector right now. Because coming out of this crisis, it (the tech sector) is well positioned to drive very strong growth,” he said.

Curtis highlighted that the expected exponential growth would materialise in the coming three to five years.

“The Covid-19 [pandemic] has accelerated the opportunity in this space and we think coming out of this current challenge, we are going to see an acceleration in technology investment,” said Curtis.

In terms of valuation, Curtis said the sector’s valuation is reasonable, given its long-term growth potential and high quality of growth.

He believes that the IT sector’s valuation is elevated but not excessive, and when compared with valuations of the S&P 500, the tech index is only at an 8% premium currently.

Curtis pointed out that the price-to-earnings multiple on S&P 500 info technology index of 25.01 times currently is nowhere near the level in 1999 to 2000 of over 50 times. “Thus, we don’t think this is a bubble,” he said.

On the local front, technology stocks can be seen swarming the top gainers list in the recent three months. Bursa Malaysia technology index, from this year’s low of 23.81 points in March, has jumped 73.2% to 41.24 points at the time of writing.

The stellar performance of the four FANG stocks has helped fuel the upward trend among Malaysian tech stocks. All three Apple Inc, Netflix Inc and Amazon.com Inc have just hit a record high on Wall Street.

Alphabet Inc, on the other hand, has rebounded US$400 to US$1,451.86 from the low in March.

Curtis expressed his optimism about the tech sector, saying that its growth “is going to go on for a long time” on the back of digital transformation.

“The big opportunity in this space is digital transformation,” said Curtis, saying that it will be supported by growth drivers such as artificial intelligence, fintech, internet of things, and 5G technology, among many others.

Curtis said the demand and the need to use the technology have really soared during the Covid-19 pandemic.

“We needed to learn how to work from home, educate from home, shop from home, exercise from home, healthcare from home, socialise from home and dine out from home,” he said, adding that there has been a massive retraining of consumers on how the services work and what it could do, during the lockdown.

Curtis noted that consumers and businesses are going to continue to use these digital services and that retraining will continue not just until a vaccine is broadly administered, but even post the Covid-19 crisis.

Furthermore, he said that the tech sector has a “very good quality” being the third-most profitable sector across the S&P 500 by earnings before interest, tax, depreciation and amortisation margins, adding that it is also one of the few S&P 500 sectors that are net cash positive.

“And it (being in a net cash positive position) really matters especially in times like this when there is so much volatility in the market,” said Curtis.

-The Edge Markets