SINGAPORE (July 16): On July 10, the technology bellwether Nasdaq Composite Index came within a whisker of its all-time high of June 20. Following a correction in early February and, again, in early April, the benchmark has been climbing higher despite rising interest rates and concerns over a trade and tariff war with China, partly because the high-growth tech sector is seen as a safe haven of sorts in the current environment. Concerns about US President Donald Trump’s policy on China’s access to key tech has in recent weeks hit stocks in the semiconductor supply chain hard, but even that has failed to halt tech stocks’ march to new peaks.

Few portfolio managers know technology like Paul Meeks, 55, who has been covering tech stocks for 30 years. Meeks actually grew up in Singapore while his father was Asia CEO of a multinational chemical company. At the height of the tech bubble in 2000, Meeks was senior portfolio manager at Merrill Lynch Investment Managers, overseeing US$7 billion ($9.5 billion) in tech-related funds under management. Then the tech bubble burst and, like other tech-focused portfolio managers, he suddenly found his funds decimated. Eighteen years on, Meeks is chief investment officer of Portland, Oregon-based Sloy, Dahl & Holst, where he manages a tech-heavy portfolio of more than US$1 billion.

“Overall, the fundamentals for tech are still pretty strong compared with the 10 other sectors that make up the Standard & Poor’s 500 index,” he tells The Edge Singapore in a recent interview. As such, it really is a question of valuation, and the concern is that they may be a little stretched, at least for some of the big tech names that make up the FAANGs — Facebook, Amazon.com, Apple, Netflix and Google’s parent Alphabet, he notes.

Still, Meeks argues that there is no “bubble” in tech right now, though he concedes that what started as a brouhaha over trade and tariffs has blown into serious friction and threatens to turn into an all-out trade war posing clear risks to the tech sector.

“Frankly, there are still plenty of opportunities in tech for long-term investors,” he says. Investors are drawn to tech, he notes, because it is among a handful of sectors in which they can still see secular growth in the current environment and the US is alone among the world’s large economies that is showing strong growth.

Until recently, with record-low interest rates, investors were hiding in dividend plays or interest-sensitive sectors or cyclicals. Since rising rates are a death knell to interest-sensitive stocks, consumer staples, real estate investment trusts and utilities, investors are now betting there is more juice left in tech. “So, the tech story is a combination of superior growth and where we are in the cycle,” he says. Tech companies sitting on the biggest pile of corporate cash in the US are beneficiaries of a higher interest rate environment. They can invest more in R&D and innovation, boost dividends and double down on share buybacks like Apple has done. Focus on big themes Meeks says investors looking to invest in the tech sector need to think of big themes that are driving innovation — such as cloud computing, artificial intelligence, mobility, mobile payments and e-commerce — and creating the most disruption. “Cloud computing is where the majority of IT spending is going,” he notes. “Within the cloud, the most attractive space is the ‘public cloud’ — or Infrastructure as a Service (Iaas) — which includes Amazon Web Services [AWS], Microsoft’s Azure and Google Cloud.” Increasingly, more and more workload is going from a company’s own data centre to the public cloud. He expects the three major US players will be joined by Alibaba Group Holding, which is growing quickly in the public cloud space in China and across Asia. Although it has underperformed in recent months, Alibaba stock is up 11% this year and 218% from its lows of February 2016. Within the cloud, there is also Platform as a Service (Paas), or a cloud platform where outside developers can write code. In that space, aside from Amazon and Google, there are players such as Oracle, International Business Machines and SAP. Paas is considered the least attractive area in the cloud space. A more lucrative area is Software as a Service (Saas), where players such as Salesforce.com, Adobe and Autodesk dominate, says Meeks. Others include newly listed electronic signatures firm Docusign, which is up 80% since its April IPO, and cloud storage provider Box, which is up 40% since February. “Salesforce’s pace of growth is slowing, but software is an area in which margins are still fairly high,” he says.

Another theme Meeks likes is artificial intelligence, which requires massive computer power. The most successful player in that space is chip giant Nvidia, which makes graphic processing chips. Nvidia stock is up 29% year-to-date and 656% since early 2016. “Their chips power data centres, big data analytics and artificial intelligence,” he notes. He also likes the mobility theme and argues that autonomous vehicles and electrification of automobiles offer huge opportunities. “These days, cars are covered with semiconductors and sensors,” he notes. A favourite stock in that space is Dutch firm NXP Semiconductors, which is being acquired by US chip giant Qualcomm, though the deal is being delayed by Chinese regulators. (A major player in advanced driver assistance space, Mobileye, was acquired by Intel last year.) Although the global smartphone market is likely to contract this year, the devices require an increasing amount of storage, which helps flash memory chip players such as Micron, Samsung Electronics Co and SK Hynix. Although DRAMs and NAND flash are commodities, the industry is essentially now an oligopoly, and weaker players have exited the market. The industry is less cyclical than before and, whether it is servers that go into data centres, highend smartphones or tablets, there is a voracious appetite for their products, says Meeks. Micron stock, which is up 152% since January last year, trades at just five times earnings and has a 3% dividend yield.

 A favourite theme of Meeks’ is e-commerce, a space in which he believes Amazon, a stock that he owns, will become even more dominant. For now, he prefers Chinese e-commerce players such as Alibaba and Tencent Holdings because they are catering to a growing middle class in emerging markets. “A better way to play the e-commerce theme is through Chinese firms that are catering to a growing middle class in emerging markets,” he says.

He also likes the payments space. Of course, Tencent and Alibaba are big proxies for mobile payments in China and, increasingly, elsewhere in Asia, where AliPay and Tencent Pay are catching on. He owns Paypal Holdings and Square. PayPal stock has had a good run, up 120% over the past 18 months. Square has done even better, up 344% over same period. “Square got some love when it said it would accept crypto payment and applied for a banking licence,” says Meeks. It has since withdrawn its application and its stock came under pressure. The way he sees it, Square and PayPal still have plenty of room to grow even after their strong run recently.

 Buy, if FAANGs fall

To be sure, the recent outperformance of Nasdaq has been driven by outperformance of the FAANGs. Can the bigcap tech stocks keep powering the rally? Meeks is not so sure. Facebook went through a tough period in March after the Cambridge Analytica scandal broke amid mounting concerns about privacy. The stock plunged 25% from its US$203 peak to US$152. It has since recouped all the losses and touched a new high on July 9. Facebook trades at 25 times earnings but its growth has slowed to 25% annually.

“I wouldn’t buy Facebook at these levels, though there may still be 15% to 20% upside left,” says Meeks. If Facebook were to tumble again, however, he would see it as a buying opportunity. “The worries about privacy are exaggerated.” Indeed, he believes that while internet players may face more regulations, it is unlikely to dramatically stunt their growth over the long run. “It may slow the momentum, but won’t derail the growth,” he says.

Meeks likes Amazon but concedes that the stock has run up tremendously. He will not buy more at current levels but, if the stock falls sharply, he might be interested. “AWS is a dominant player in its segment and Amazon is the biggest e-commerce player in the US,” he notes. AWS is still growing at 40% to 50% annually, with 20% to 30% operating margins, whereas margins on Amazon’s retail business are typically like a retail store’s 2% to 3%. Amazon stock trades at more than 80 times next year’s earnings.

Alphabet is another stock that he owns and likes. “It’s closest to my price target. So, on any pullback, it is the one I’m likely to buy first,” he says. “Google has shown a rare ability to transition to new products to stay relevant. Tech companies dominate one product but often struggle to stay relevant in the next tech cycle.” Google has a dominant share of search advertising, but it also built Android, the dominant mobile operating system. “When we transition to autonomous vehicles, Google’s Waymo will probably be way ahead of others.” Alphabet stock, up 10% this year, trades at just over 23 times this year’s earnings.

 Avoid Netflix, Facebook rivals

One stock he is wary about is Netflix, which is up 118% this year, or 790% since January 2015. “Netflix gets a lot of love from Wall Street, but it has just gone too far too fast,” he says. “It may also be reaching a saturation point in the US because everyone who wants Netflix already has it.”

The key to Netflix is international growth. “Its main driver is proprietary movies and documentaries, and they are expensive to produce,” says Meeks. Until now, Netflix has had the field to itself, but Amazon is chasing the same market and the e-commerce giant can be ruthless in trying to grab market share, he argues. There is also Apple, which is expanding its content creation business; if the Walt Disney-21st Century Fox deal goes through, Netflix will have another formidable challenger.

Meeks does not think anyone will buy Netflix, which now has a market capitalisation of US$180 billion. Apple rarely does acquisitions because its culture is that it can do things itself, he notes. Even if it were interested, Netflix would be tough to swallow. “Apple is the world’s largest market cap firm, with more than US$200 billion cash, but it is too reliant on one product: the iPhone. They generate a huge load of cash and there has never been anything like it in the history of the world, but how do they grow bigger? Apple desperately needs a new trick. But I think instead of buying a Holly wood studio, they should focus on the cloud and buy Adobe or Salesforce.com.”

If there is one tech stock he would recommend investors buy right now, it is T-Mobile, the No 3 US phone company, behind AT&T and Verizon. T-Mobile is in the process of buying No 4 US player, Sprint. He likes T-Mobile because its stock is close to a 52-week low. T-Mobile has been taking market share from AT&T and Verizon, which have been busy expanding in Hollywood and on the internet. “As we transition to 5G over the next five years, T-Mobile could emerge as the biggest player, with or without Sprint, because their technology will be superior. They are tightly managed, aggressive, and Wall Street loves the CEO, John Legere.”

 Is there one segment of tech that investors should stay away from? Meeks is wary of some of the “dangerous” social media companies, which all claim they will unseat Facebook but have never come around to doing it. Twitter has had a huge run, up 170% since early last year, he notes. He is not convinced that Snap has much of a future. And even though it is well worn and among the most shorted tech stocks on earth, Meeks says no tech stock worries him more than electric vehicle pioneer Tesla. “Tesla has a serious manufacturing problem and is burning US$1 billion in cash every quarter and has US$2 billion debt due between now and the end of March,” he says. “Everyone thinks Elon Musk is the next Steve Jobs, but he keeps missing his audacious goals. If it were any other stock, it would have been crushed by now, but he has an aura about him.”

The way he sees it, competitors such as Volkswagen, General Motors and BMW are ready to roll out their own electric vehicles. Musk has a small window of opportunity and his time is running out.

If trade and tariff wars between the US and China get worse, Meeks thinks tech hardware and semiconductor stocks will be directly hit but, psychologically, every stock will be affected. “Trade wars are scary,” he says, but adds that long-term investors in tech will be rewarded once the dust around trade settles.