What are the hot areas for tech investors to be putting their money into? Daniel Bailey of ECI Partners looks into his crystal ball
From a pricing and valuation perspective, it’s been a difficult year for tech stocks. Even blue-chip names such as Microsoft, Apple and NVIDIA have faced material price corrections on the financial markets. At one point in mid-October, Morningstar’s US Technology Sector index was down more than a third on the beginning of the year. Even after a slight rally, it remained a quarter lower in early November.
However, technology businesses continue to demonstrate good levels of growth as the world becomes increasingly digitised. Additionally, many tech businesses have resilient characteristics meaning that they remain attractive to investors.
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There are good reasons to be optimistic for the future of tech. For a start, there have been several years of strong growth – and not just among the giants. Last year was the best-ever for the UK tech industry in terms of investment, with the sector securing £29.4bn in funding. As the Department for Digital, Culture, Media & Sport, summed up: “More VC investment, more unicorns, more jobs and more futurecorns.”
Perhaps more importantly, as businesses face up to a challenging environment, they’ll rely on technology more than ever to secure the efficiencies and opportunities necessary to survive and even thrive in a tougher climate. This should ensure that certain niches of the technology ecosystem will continue to see growth.
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Four tech investment trends in particular stand out.
1. AI and machine learning
In an inflationary market, many businesses will be looking to drive efficiencies. This will lead to continued and growing demand for AI, machine learning and the automation which comes with it. Reducing reliance on human resources and boosting efficiency will always be popular as labour and other costs rise, but what we are seeing now is applications going well beyond simply streamlining processes.
For example, Mobysoft, an ECI investment, uses predictive analytics to help social housing providers keep their tenants in well-maintained homes, while improving rent collection and reducing arrears.
AI can also help drive new business. CPOMS, a former ECI investment, provides a good example. It used ALTERYX analytics software to create a new business identification model, prioritising prospective customers by analysing the most common features of its existing user base. Such tools will be valuable for businesses looking to source new revenue.
The cloud also offers a significant opportunity for businesses to both cut costs and develop new capabilities. Public cloud hosting allows businesses to rapidly scale up or down their operations without incurring significant capital expenditure, which can prove useful either for investing additional free cash in growth initiatives or in taking defensive action in more scenarios. The old financial adage of “cash is king” remains as true today as it ever did.
Moreover, the range of cloud services and tooling offered by the hyperscalers is growing. For example, Microsoft has launched an IoT Hub in its Azure platform, which enables companies to construct customised solutions for complex scenarios to facilitate IoT use cases. This is likely to become even more useful as the range of potential applications of IoT expands with the rollout of the 5G spectrum and the increasing prevalence of low-power IoT networks.
Crucially, public cloud platforms offer businesses the ability to keep tighter control of their fixed costs, both in terms of the technology, the internal IT capability and the floor space which historically may have been used to house on-premise infrastructure. This capability point will be particularly valuable at a time when such skills are expensive and in short supply.
3. Simplifying coding
“Learn to code” was once the default advice for employees hit by redundancy or those who found themselves in a declining industry. More recently, it has become a significantly in-demand skill as SaaS and software has become increasingly prevalent. However, while historically it was imperative for a developer to learn one, if not several, distinct coding languages, the increasing development of low-code platforms should increasingly democratise and make it simpler for non-technical individuals to create products and applications without having to learn a language.
This trend will allow a greater range of businesses to produce software and accelerate products to market by simplifying development. It may also help address shortages in the number of developers given the current war for talent in this space.
4. Keeping secure
Finally, cybersecurity is certain to remain a priority for businesses and individuals, regardless of how the economy performs, particularly given the increasing number of malicious individual or state actors. Notably, there have been massive global increases in the use of ransomware to extract capital from afflicted businesses. There are even guides on how to launch ransomware attacks on the dark web, so this is an increasingly important and sadly frequent issue that businesses have to face.
High-profile attacks tend to make headlines, the most recent being a severe attack on Uber in September 2022, which was started by a hacker who manipulated an employee into sharing their password through a remote access portal on their mobile phone. Via this one small error, the hacker was able to gain access to the company’s critical infrastructure. However, it is not just high-profile corporates that are at risk. The threat is ubiquitous with attackers targeting businesses of all sizes and on occasion for relatively small sums of money.
In the face of an increasing frequency of cyber attacks it is imperative that businesses protect their digital assets, IP and customers’ data. This creates a beneficial backdrop for cybersecurity businesses to grow and create value for shareholders.
Businesses should continue to invest in these areas to ensure they are best placed for the future. Technologies and tech services providers in these areas are likely to thrive, with strong prospects for growth and valuations.
Daniel Bailey is investment director at ECI Partners
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