Emma Wall: Hello, and welcome to this special SIPP edition of three stock picks. I'm Emma Wall and I'm joined today by Killik & Co.'s Rachel Winter.
So, Rachel, what's your first SIPP stock pick?
Rachel Winter: Good morning, Emma. Well, if we are looking at SIPP investments, I think some investors can afford to take a slightly different approach. You can't take any money out of a SIPP until the age of 55. Therefore, many investors do have a slightly longer time horizon. Therefore, they can afford to take on slightly more risk. And for that reason, this week, I'm looking at some of the big technology stocks because they have come down quite a lot in recent weeks and in fact, over the year-to-date so far.
So, the first one I'm looking at is Amazon. So, this has come down recently because of some negative comments from Donald Trump. So, he has criticized Amazon for taking away jobs from the retail sector and also for taking advantage of the U.S. postal service. So, for that reason, the stock has come down. But in our view, it's still looks like a very attractive growth opportunity. So, I think, it probably will be volatile over the coming weeks. But within a SIPP, I think, you can afford to take on that volatility.
Wall: As you mentioned, Trump made some comments on Monday, which caused the stock to fall 4% and not insignificant amount for a one-day move. How concerned are you that stocks of this nature such as Amazon are sensitive to political rhetoric?
Winter: It depends on the stock. I think these big American tech stocks are fairly sensitive because they are primarily U.S.-based. But Amazon is a global business and what's more, it has a number of different revenue streams. So, yes, it's involved in retail sales and actually, at the moment, it only accounts for about 3% of U.S. retail spend. So, there's still a lot of opportunity for growth there. But also, it's heavily involved in cloud computing services.
So, AWS withstands for Amazon Web Services. That's it's cloud-based service. It's a market leader in cloud and that's growing incredibly quickly. That's something we think will continue. So, yes, there might be some regulation that could affect small parts of Amazon's business, but we think it has enough of a diverse revenue stream for its growth to continue over the coming months and years.
Wall: And what's the second stock pick?
Winter: Second stock is another technology giant. This is Microsoft. So, it used to be the biggest tech company in the world when it was first launching Windows. That did incredibly well. Recently, it has somewhat lost its way. No longer the biggest tech stock in the world. But back in 2014, it employed a new Chief Executive called Satya Nadella and he is focused very hard on moving the company away from desktop towards cloud-based computing.
So, when he first started leading the company back in 2014, cloud was worth about 1% of Microsoft's revenues, now it's worth just under 30%. So, that shows you how far he has come in such a short space of time and is still growing incredibly quickly in this area. So, Microsoft is still a company that we like very much.
Wall: You've mentioned two stocks there which do cloud computing; Amazon with Amazon Web Services and Microsoft with Microsoft Azure. How confident are you that these two companies can retain their market share and indeed grow it in the future?
Winter: We think there is room for both of them to grow actually. So, both, Amazon and Microsoft, the two of them are by far in a way the leaders in cloud computing at the moment. So, Amazon has got an advantage with new younger companies because it is that much cheaper. But Microsoft has an advantage with the older more established companies because it already has that relationship with them because of Windows.
So, it's able to move in and help those businesses move to cloud. And we are seeing so many large businesses at the moment moving away from having datacenters in-house towards the cloud. So, I think, this is a space that will grow hugely over the coming few years and I think both, Amazon and Microsoft, will benefit from this.
Wall: And what's the third stock pick?
Winter: Third one is Alphabet, which is the parent company for Google. So, obviously, a huge leader in online search and we think it will continue to do well there. It's growing very quickly. We don't think the stock is particularly expensive for a company that's growing so fast. And also, it has other revenue streams as well. So, it owns YouTube, makes a lot of money there.
It has valuable content platforms such as Google Finance and Google Maps. And also, it's involved in autonomous vehicles. So, it owns Waymo, which is involved in autonomous vehicles. So, again, that's another future potential revenue stream for Alphabet. So, lots of potential growth opportunities there.
Wall: You mentioned there that you didn't think that Alphabet, Google, was expensive for growth of this nature. I think in the past a lot of investors have been put off tech stocks because they seemed to be priced so completely differently from other sectors. But this is just the nature of tech stocks, isn't it?
Winter: It is. It has historically been a sector that has traded on a higher multiple to other stocks within the index. But I think it's worth paying that if you are getting a much higher level of growth. But Alphabet at the moment is trading on about 23 times price to earnings. I don't think that's hugely high than the rest of the index. So, the S&P at the moment is trading on around 16 times. So, 23 times, I don't think is a huge premium to pay for a company that's growing that much quicker than the rest of the constituents of the S&P 500.
Wall: Rachel, thank you very much. This is Emma Wall for Morningstar. Thank you for watching.
