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Stepan Lavrouk
Stepan Lavrouk
Articles (547) 

Bill Ackman: How to Invest in Technology Companies

Ackman’s Pershing Square looks for technology as a competitive advantage

June 25, 2020 | About:

The rapid rebound in equity valuations that has taken place since the March correction has been a pleasant surprise to investors in all sorts of different asset classes, but one sector stands out amongst the rest - technology. Tech stocks have been doing exceptionally well since the initial coronavirus selloff, with the Nasdaq index hitting new all-time highs on June 23rd.

On one hand, this is understandable - technology businesses are comparatively less adversely impacted by lockdown restrictions than those in other industries. Indeed, for some tech stocks, lockdown has been a boon to business: just look at e-conferencing company Zoom (ZM), which is up 148% since March 13.

On the other hand, this does invite the question of whether the bull rush in tech stocks has gotten ahead of itself. In a recent interview with Bloomberg, activist investor Bill Ackman (Trades, Portfolio) explained how he values technology companies, what appeals to him in this sector and what doesnt.

Technology needs to be an advantage

Ackmans Pershing Square has generally been pretty quiet when it comes to the tech sector, instead preferring to invest in businesses in consumer retail and hospitality. However, this doesnt mean that Ackman is blind to the competitive advantage that technology can offer.

For instance, Starbucks (NASDAQ:SBUX), which comprises 12% of Pershing Squares portfolio, is obviously not a technology company in the traditional sense, but it does have a significant advantage compared with smaller coffee chains due to its digital ordering and delivery systems. He drew a distinction between "pure tech" companies and companies whose business is augmented by technology:

We are not investors in pure technology companies. We would not invest in a self-driving company with no revenues. But many of the businesses we own are heavy users of technology, whether they are consumer-facing or whether theyre industrial or manufacturing companies. Were looking for businesses with very attractive economic characteristics. There are many companies in the Nasdaq that people think of as tech companies but they have the kind of characteristics we like. We just dont like the kinds of businesses where a couple of young people in a garage somewhere in Silicon Valley can come up with a technology that disintermediates the business.

So you wont see Ackman backing an unproven smartphone app with no road to profitability - hes not a venture capitalist, after all. However, he has clearly considered the implications of widespread technology adoption for brick and mortar businesses.

I think this is a better way to think about investing in tech. Its not enough for a company to have some well-known piece of software that everyone uses. It needs to have a track record of profitability and solid cash flows (two factors that Ackman considers to be extremely important when investing).

So what is the main take-away from this for investors? Be wary of glamour stocks that promise profitability down the road, no matter how well they are performing in terms of share price, and stick to investing in quality businesses which are embracing and implementing technology to augment their existing revenue streams.

Disclosure: The author owns no stocks mentioned.

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About the author:

Stepan Lavrouk
Stepan Lavrouk is a financial writer with a background in equity research and macro trading. Specific investing interests include energy, fundamental geoeconomic analysis and biotechnology. He holds a bachelor of science degree from Trinity College Dublin.

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