An interview with Ben Rogoff, a fund manager at Polar Capital who focuses on technology investing in his two funds: Polar Capital Technology Investment Trust (PCT) and Polar Capital Global Technology Fund. Rogoff discusses market misconceptions related to technology valuations.
Companies Mentioned in this Video:
Hewlett-Packard (HPQ)
Nokia (NOK1V)
Apple (AAPL)
Salesforce.com (CRM)
Facebook (FB)
Google (GOOG)
Concur Technologies (CNQR)
F5 Networks (FFIV)
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Fund Managers' Favourites: 3 Technology Picks
Transcript:
Alanna Petroff: It's always nice to find a good high quality company with a very low P/E ratio, but sometimes we can't always find those kinds of companies. I am joined today by Ben Rogoff. He specialises in tech investing, where generally you have very high P/E ratios and we're going to talk about valuations. So, Ben, thank you for joining me.
Now let's go over: how do you see valuations working? You have a bit of a different opinion than many on this.
Ben Rogoff: Yeah, I mean, I should set the scene and just say that the tech sector is for many people still synonymous with the period in the '90s, where there was some pretty outlandish valuations applied to some fairly average assets, and so unfortunately the rest is history, as they say.
Right now, the tech sector actually trades at a market multiple or even slightly below it when you consider that we have the most net cash and all of that good stuff on the balance sheet. But having said that, the aggregate valuation of tech to some degree obfuscates the very basic decision a tech manager has, which is: do you gravitate towards value names? That’s where there are often companies that look very cheap, free cash flow yields are high – higher than average. Or do you instead favour a bunch of companies where they have about average growth, but the ticket price for those assets is higher than average? And I'm very much in the latter camp. So, you're right. I would rather favour a basket of companies that in quotes looked “expensive”, but actually that we have high conviction that those earnings numbers are way too low, rather than a basket of companies that looked cheap, but where they find themselves structurally challenged.
Petroff: So, what kind of companies do you think look cheap, but you wouldn't go for them?
Rogoff: Well, I mean, Hewlett-Packard is a classic example of a company that optically has an attractive free cash flow yield. They're trying to do the right things in terms of restructuring, and yet the balance sheet continues to deteriorate. Their core proposition to investors and to their customers seems to be diminishing. I mean, the idea of the iPad and how much less printing I'm now doing must have a direct impact on Hewlett-Packard given their exposure to say printer supplies.
Take a Nokia, which we haven't owned for years. That's a company that has looked cheap all the way down. And yet the product that they make, to some degree, has been made obsolete or subsumed by the product that Apple now makes.
Petroff: Right.
Rogoff: So I think, in technology, the very important kind of I guess observation, conclusion that one comes to–I've been doing this for 15 odd years or so--is that the corporate longevity is much more difficult in the technology space. There is always someone else coming with some innovative alternative that often, either has a product set that is vastly superior to the incumbent one, or where the price is much, much cheaper. So, Salesforce.com is challenging a whole bunch of companies with incumbency and that's the issue. In lots of other sectors, incumbency is a great thing. But in tech, prices always fall. So such that when a market becomes relatively mature, there is no real volume offset to that ongoing price deflation and that's what makes those incumbent companies particularly challenged.
Petroff: So, let's go through a few companies that might look expensive to some, but you're really liking right now. You just bought Facebook, right?
Rogoff: Yeah, you're going straight for my heart with that question.
Petroff: Sorry.
Rogoff: No, that's fine. I mean, we did – we’ve been public and said that we like the asset, and we really liked the asset in the original IPO range. Obviously the range was then raised. We picked up, I think, 20 basis points in the IPO, so I don't want to overrate this.
Petroff: Not a ton. Right.
Rogoff: But having said that, in the retracement, where the stock’s come back to $31, $32, we have been adding to the position. I do like the asset. So there is a company that on trailing earnings looks like it’s, I think, 100 times or something along those lines. Naturally people will, and rightly, blanch at that type of valuation.
Having said that, I was a Day 1 investor in Google in 2004, and I remember people blanching then. Yet the company delivered earnings in the following year that analysts had modelled for three years out.
This is the key. I referenced earlier, why I would rather buy a basket of companies that look expensive, and the key is “look”. If they are expensive and that the earnings estimates are what they are, then that's actually not as good a company that you’d want to be invested in. What you need to do is have high conviction that the companies you are investing in are at or approaching an inflection point in their businesses, and if that's true, the forward earnings will be a very poor measure of where the company actually delivers. So, that was true of Google. We're pretty confident, not 100% because you can't ever know, but we're pretty confident that Facebook fits into that category of companies.
Petroff: Any other companies?
Rogoff: Sure.
Petroff: Okay.
Rogoff: So, quite a few. I mean, if you look at companies in the software space, we're quite interested in this idea of software as a service, where you deliver software in a web browser like the Salesforce.com, but a whole sort of myriad of alternatives as well. Additional names like Concur, which looks expensive, but really is growing at 30%.
The interesting thing about the model of ‘software as a service’ is that the expenses are all taken upfront, but because the revenues come in a kind of recurring basis, so it's a rental model, you get all the impact of the cost upfront, but you don't get the goodness of the revenues all upfront as well. So, the stocks end up looking more expensive than they really are. So in those particular companies, we look by operating cash flow multiples as a better way of valuing the company.
Petroff: Okay.
Rogoff: Then beyond that, there is a bunch of companies like F5 Networks that we think is a strategic company and playing in the data centre. The stock’s never really looked cheap as such, but when it gets back into the sort of 20 times forward earnings range we think that’s a pretty good buying opportunity, which is where it is around now.
Petroff: Thanks very much for coming in.
Rogoff: Pleasure.
Petroff: That was Ben Rogoff from Polar Capital, and I am Alanna Petroff. Thanks for watching.
