GVA Research on CNBC Asia: CES Preview, and is 2016 the year for FANG stocks?

Tech – Secular Growth Supports Sector’s 2016 Performance Prospects, But Rising Rates Favor Total Return Names

The technology sector provided an above-average 2015 return, but was not the market leader as the consumer discretionary sector was lifted by employment gains coupled with the positive consumption effects of lower oil prices. For 2016, the technology sector will continue to be well-positioned with stronger secular growth prospects than the broader economy due to positive trends in cloud computing, smartphone penetration and social media adoption. However, in 2015 with interest rates low, shares of high growth/low profit companies received high valuations. Companies such as Facebook (FB), Amazon (AMZN), Netflix (NFLX) and Google (GOOGL), popularly known collectively referred to as “FANG”, benefitted as monetary conditions supported high duration investments and led the sector higher. Now, with U.S. monetary policy tightening in 2016, investors may shift their focus towards tech sector names well-aligned with underlying secular growth trends but offer investors total return through dividend payments and are thus lower duration investments. Consequently, companies such as Apple (AAPL), Intel (INTC), Microsoft (MSFT) and Nokia (NOK) should outperform. Away from changing monetary conditions, slowing global economic growth and negative foreign currency effects (i.e. strong U.S. dollar), tech sector performance may be dampened to extent late-stage companies pursue IPO exits over course of 2016.

Tech – Venture Capital Sector Slowing, Markdowns A Cautionary Sign

The excesses seen in late-stage start-up company valuation with the creation of multiple $1bn+ valuation “unicorns” will be limited in 2016 as fund flows to sector slow with more attractive returns being offered in other asset classes. Sector insiders concerned that 2015 saw more “prints” (i.e. valuation mark-ups due to funding rounds) than “exits” (i.e. IPO or merger) despite public market conditions that were on balance relative favorable. At some point, private company valuations need to validated by either a market event (i.e. IPO or merger). Hudson’s Bay Company proposed $250mm acquisition of eCommerce firm Gilt Groupe, a start-up with a $1bn valuation based on a 2011 $138mm funding round, should raise concern among investors. Meanwhile, the pullback of established public companies from pursuing “acqui-hires” to bring on capable talent offers further evidence private company valuations are out of line with levels where acquirers can create requisite returns. Arguably, a rising yield curve will on the margin shift capital away from venture capital.

Tech – CES Offers Insight On Emerging Companies In Virtual Reality, “Internet of Things”

The Consumer Electronics Show (CES, runs from Wed 1/6 to Sat 1/9/16) is expected to showcase developments in virtual reality as well as in the broadly defined “Internet of Things” (IoT). Private companies for investors to consider include August (a maker of smart home security products including a smart lock and smart doorbell camera (www.august.com)), iDevices (a developer of app- and internet-connected home products that connect wirelessly within the Apple and Android ecosystems (www.idevicesinc.com)), Leap Motion (a maker of smart home security products including a smart lock and smart doorbell camera (www.leapmotion.com)) and Virtuix (the company has developed a “motion platform” for virtual reality, a kind of step machine with motion trackers that allows people to explore virtual worlds without the side effect of motion sickness (www.virtuix.com)).