Outrunning the overvalued unicorns

Each week, a professional investor tells MoneyWeek where he’d put his money now. This week: Walter Price, co-manager, Allianz Technology Trust.

Originally named for their rarity, technology “unicorns” are now as common as pigeons on Wall Street – from Airbnb to Uber, growing numbers are hitting the $1bn valuation mark that defines a unicorn. But high-profile investors warn that these valuations are unsustainable. In March, venture capitalist Bill Gurley predicted “dead unicorns” before 2015 was out.

This month, Salesforce.com boss Marc Benioff warned tech groups of the dangers of staying private for too long at very high valuations. He said entrepreneurs were being lured into setting high valuations by the huge amounts of money on offer – but then struggled to go public, because these valuations can’t be achieved in the public markets.

There’s some truth in this. These are exciting, high-growth companies, but in effect, they are leaving no room in the valuation for investors. This is one reason why the IPO (initial public offering) market is relatively weak. If too many list at too high a valuation they will alienate investors and create widespread disenchantment. This would be a shame for new companies coming to the market and for tech-sector diversity generally.

So rather than eyeing up the unicorns, we suggest investors take a hard look at mid-cap public companies that have already gone through this re-rating process, and who are set to see high profit growth over the next few years. These stocks sell at 50% discounts to the unicorn valuation and could rise significantly in the coming years.

Away from unicorns and mid-caps, another area that interests us is driverless cars, which are edging ever closer to reality. Tesla Motors (Nasdaq: TSLA) has introduced an autonomous driving feature as an over-the-air update. Tesla cars can now, in theory at least, drive themselves to their destination.

It is not yet quite possible to sleep and wake up at your destination – the driver must stay in contact with the wheel at all times. But to date, the new feature has helped avoid a number of accidents and hasn’t caused any. So while it’s not yet full automation, it is significant progress – and another reason for car buyers to opt for a Tesla.

Some of our other favourite stocks include online giant Amazon (Nasdaq: AMZN). It’s our largest holding and its two core businesses are booming. In retail, Amazon now powers the infrastructure for a third of ecommerce in many markets, and margins are rising as capacity utilisation improves. Amazon Web Services, meanwhile, is running away with the cloud infrastructure market by offering customers ten times the scale and variety of other services, as well as steady price cuts.

Microsoft (Nasdaq: MSFT), our second-largest holding, also offers cloud computing for the millions of customers who want to run its applications in the cloud. The company is getting its mojo back by focusing on the needs of its own customers, after a frustrating 15 years of unsuccessfully trying to copy Apple and Google (both of which we also own in the trust).

Finally, there’s Palo Alto Networks (NYSE: PANW), which provides network security tools – it puts up firewalls that identify and control applications and scan content to stop threats and prevent data leakage. Demand remains strong, as increasingly sophisticated cyber-attacks have triggered more spending on providers who offer new security technologies that generate fewer but more meaningful alerts. This group offers a best-in-class product suite in a rapidly growing area of technology.

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