Jonathan Mzengeza, Equity Analyst, CIBC Asset Management
If you look at the tech space there's been overall positive secular trends that have pushed technology higher. So things like e-commerce, cloud, AI and machine learning, that have pushed the multiples higher. And then for the rest of the year we're looking at heightened, more volatility and pockets of strength and weakness. Two sectors that we're watching closely would be internet services, where the impact of GDPR hasn't been fully realized, and there's increased scrutiny and regulation on personal data for the users on the likes of Facebook, Snapchat, and Twitter. We're also focusing on software where we see increased investment driven by the positive impact of tax cuts and digital transformation by certain companies.
What is “cloud”?
Cloud is the delivery of computing services over the Internet. The three main providers of cloud services right now are Microsoft, Amazon, and Google. And we've seen an accelerating pace in their revenue growth. Amazon web services growth was 30 percent last year, accelerated to 40 percent this year. We've seen Microsoft and their Azure cloud has been growing at almost 90 to 100 percent over the last few quarters. So we see accelerated growth for cloud computing.
What is eSports?
eSports is competitive sports using video games. Similar to traditional sports you've got professionals and amateurs, you have professionals who train almost every day. You've got sponsors, you've got advertisers who want exposure to that demographic, and that's how we see most revenue coming from sponsors and advertisers and media outlets. These are the type of audiences which are difficult to reach on traditional sports. And we see ad revenue and sponsors divert some of their ad dollars away from traditional sports into eGaming. So if you compare the most popular tournament, which is League of Legends, so the League of Legends final had close to 56 million views which is more viewers than the NBA finals.
Companies to watch?
One of the companies that we think is best positioned going forward in terms of secular trends is Microsoft. So the reason why we like Microsoft is it's well positioned in several areas where we think there's going to be robust growth. The first one is cloud where Microsoft is second only to Amazon in terms of revenue. The second one is gaming where Microsoft has their Xbox platform and can provide video gaming streaming services through their Azure platform. In addition to that Microsoft does have a very solid balance sheet, and given the new tax rules in the U.S. a lot of their cash used to be offshore and that cash can be brought onshore in order for dividends, buybacks, as well as some tech and M&A acquisitions.
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