The outperformance of US tech giants this year is due to strong fundamentals, and not to a flight to safety or quality from investors or central bank intervention, says Mark Baribeau, managing director and head of global equity at New York-based investment manager Jennison Associates.

Baribeau said he was not surprised by the “huge bifurcation” that had seen technology companies leap ahead–particularly companies getting their products direct to consumers via ecommerce or omni-channel retailing, and those working on digital transformation of enterprises at the Investment Magazine Fiduciary Investors Symposium on Tuesday.

“The fundamentals are what’s driving the stock, not interest rates or a flight to safety or quality, whatever you want to call it,” Baribeau said. “It’s old-fashioned revenue growth and tremendous free cash flow generation, that’s what investors have been attracted to.”

 

They had not benefitted more than other equities from central banks reducing interest rates to zero, he said.

When quizzed on whether investors should be worried about companies such as Amazon and Netflix being rewarded for traction and growing their user base while maintaining relatively small profit margins and cash flow, Baribeau replied he “wouldn’t be concerned about it at all.”

“The market doesn’t want Amazon and Netflix to slow down investment spending, they want them to go on this land grab while they have the opportunity because it’s once in a generation opportunity,” Baribeau said.

The shut down of studios had led to over $1 billion of free cash flow generation in the third quarter at Netflix “because they just can’t spend it”, Baribeau said.

Amazon’s growth rate of 40 per cent in the second and third quarters was “astounding” from a $270 billion revenue base.

“Their growth margin is 58 per cent, so you’re talking about big profit dollars that they are generating,” Baribeau said. “The minute they slow down on investment spending their operating margins will explode.”

Baribeau said he believed Tesla’s Model S in 2012 was the most important consumer product innovation since the iPhone in 2007, disrupting an industry that had long been lacking in innovation. With major increases in production capacity underway, revenue could climb from $30 billion this year to $75-$90 billion in 2024, which the market is excited about, leading to market cap expansion this year.

He said founder Elon Musk is “quite the headache when it comes to governance” but it was often messy when startup entrepreneurial culture clashes with big business norms.

“We have tried to manage position size reflecting governance risk but today I think it’s on a steadier path than any time in last three or four years,” Baribeau said. “So I think they have learned their lesson.”

When asked if he was concerned about the market dominance of US tech giants preventing new entrants or even stifling innovation, he said he wasn’t. New entrants just need to capture the imagination of the consumer, they don’t necessarily need huge R&D budgets, he said.

He gave the example of TikTok which “came out of nowhere globally” despite competing against cash-rich giants Facebook and Tencent. Canadian e-commerce company Shopify had managed to become the third largest e-commerce retailer in the US ahead of Wall-mart and Apple at the end of 2019.

“You just have to create a process that looks for that innovation engine and just look for companies that are supplying an unmet need in the marketplace and you can generally be quite successful even if they seemingly start off with such a small advantage compared to the behemoths,” Baribeau said.

You can see the full interview with Cbus’s Kristian Fok in Fiduciary Investors Symposium’s digital hub.

Ben Hurley is a journalist and editor with more than a decade of experience in the industry. He has written for The Australian Financial Review, Business Review Weekly, The Guardian and a range of specialised and industry publications.
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