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The technology sector today is breaking new ground, not just through its stream of innovative products and services, but also via dazzling market performance. On August 2, Apple, a company founded in a California garage 42 years ago, became the first US firm to hit $1 tn in market capitalization. The next largest US firms? They are mostly tech too. And if they aren’t, tech is still central to what they do.
IROs in the technology sector are used to feeling the wind in their sails. The current bull run in US stocks, now officially the longest in history, has been driven by tech disruptors that became household names.
But challenges remain for IR teams. They constantly battle sky-high expectations from investors, as even slight changes in guidance or outlook can result in outsized movement for a company’s share price. More recently, institutional investors have grown wary of the market’s rise and now treat major new investments with caution. The emerging trade war between the US and China only adds to their jitters.
The rise in tech valuations shows you where a large portion of the money is going, says Seth Rosenwasser, senior technology analyst at Nasdaq IR Solutions. ‘Overall, tech is really booming,’ he states. ‘And a lot of that additional alpha is the disruption – technology is transforming every industry. It’s hard nowadays to view companies, even if they are classed in different categories, as non-tech companies.’
Indeed, the influence of tech across the board is causing headaches for people tasked with defining market sectors. In August, the body that classifies industries for S&P 500 and MSCI responded by remodeling its ‘telecommunications services’ sector into an expanded ‘communications services’ sector. The new grouping includes familiar names such as Google, Facebook and Twitter.
It’s fair to say the investment community as a whole is currently in thrall to tech stocks. But when you look at different market participants, the picture is more nuanced. This rally has been driven more by retail investors and hedge funds than institutional investors, points out Rosenwasser. ‘The way institutional investors see the market today, they think it’s a little hot and valuations are a little stretched.’
Furthermore, tension between the US and China adds more reasons to leave money on the sidelines. ‘When you are an institution managing funds of this size, I don’t think you can be comfortable in this environment with the uncertainty in Washington, D.C.,’ says Rosenwasser. ‘To make an investment now seems risky when you can wait, see how this plays out and then put your money to work.’
One side effect of US President Donald Trump’s trade aggression toward China is a drop off in M&A activity involving US tech companies, adds the Nasdaq analyst. ‘In 2015, 2016 and the beginning of 2017 there was a tremendous amount of M&A that was fueled by Chinese-backed firms and that has fallen off dramatically,’ he says. ‘Domestically, the US is really cracking down on the M&A scenario when it involves a Chinese partner.’
While tech-sector IR professionals have had less M&A to think about, managing market expectations amid booming share prices and hype around new products remains a significant challenge.
Adding to the complexity is the evolving nature of the buy side: computer trading and passive investment have made it harder to answer the perennial IR question of what's going on with the stock. Thomson Reuters Lipper estimates that exchange-traded funds have roughly $90 billion currently invested in the tech sector.
‘Markets are becoming more efficient, they’re becoming quicker, and for IR professionals it’s very tough to keep up with this ever-evolving landscape,’ says Rosenwasser. ‘IROs may not be aware of who is participating in the market, who’s not participating, and you need this information to conduct a valid and current IR program.’
Rosenwasser says a common ‘pain point’ for tech companies is when management is expecting a favorable reaction to earnings – and they get the opposite. ‘That disconnect usually happens when you don’t fully understand what kinds of investors are very dominate in your stock and trading,’ he explains.
Passive money can also cause surprises – because it’s not always truly passive. ‘Although passive investors do not trade in the open market, they definitely don’t sit still,’ he says. ‘They provide other services, whether it’s through stock loaning or taking part in liquidity events. They are active behind the scenes and we see this when we look at the trading data for our clients.’
In short, tech IROs need to stay on their toes. A solid knowledge of your shareholder base and the changing buy-side landscape are key to staying ahead in this ‘buzzing’ sector, concludes Rosenwasser.
