Next week fleets of couriers will be delivering a new device to tens of thousands of British homes: the £149.99 Amazon Echo.

It’s a voice-controlled, cylindrical speaker that sits on a tabletop.

Just another gadget? Or something more significant?

The device automatically updates software to continually improve its performance, like an iPhone.

It responds to the spoken command of its owners, answering questions on anything from the weather outlook to traffic reports and share prices, train times, word definitions, recipes and spelling.

It can find radio programmes and stations and play music or read audiobooks; it can link to your electronic diaries and recite your daily appointments – or add items to the to-do lists stored on your phone.

It can also shop for you online or order pizzas, taxis and more.

So much for the device: investors and analysts are interested in it beyond its technological capabilities, and view it instead as one of several bellwethers that can indicate the success with which giants such as Amazon are expanding into new, potentially profitable areas.

Whether these astonishing businesses can continue to deliver profit growth – as well as life-transforming products and services – is crucial.

Amazon, Google, Facebook and other technology firms are now among the world’s biggest companies.

Most investors, in Britain as well as the US, own slivers of them via the funds we hold in our Isas and pensions.

By traditional measures of value, such as the ratio of share price to earnings (p/e), these companies are expensive.

The S&P 500 index of American stocks – where tech giants Apple, Google (through parent company Alphabet), Amazon and Facebook feature near the top – has a p/e of around 19. In other words the index as a whole is priced at 19 times the anticipated annual earnings of its constituents.

But Facebook’s p/e is nearer 30 and Amazon’s is approaching 50.

High p/e ratios would usually cause investors to consider taking profits by selling down their holdings. The question is whether investors should make special exceptions for these extraordinary businesses, and count on them to deliver even more.

‘It’s different this time’

After the 2000-03 global market collapse, triggered by a flood of speculative investment into technology stocks in the late Nineties, huge suspicion has attached to the idea that age-old investment theories – such as p/e ratios reverting to a long-term mean – no longer apply.

Ben Preston of Orbis Investment is a traditionalist. “Future returns can be thought of as the difference between what’s expected now and what actually turns out,” he said.

“In the tech bubble of 1999-2000, companies like Microsoft, Cisco and AOL were expected to enjoy long and robust growth. Some have done very well but, as the decline of AOL shows, others haven’t.”

He frets over the valuations of stocks such as Facebook, Amazon, Netflix and Google.

“Today’s giants are already priced to deliver continued rapid growth, so it may prove a tall order to beat expectations.”

Tom Slater co-manages the £4bn investment trust Scottish Mortgage, admired for its exceptional returns and its very early investment in Amazon, alongside a long list of other successful tech stocks.

Mr Slater’s view is diametrically opposed to Mr Preston’s.

“People say that it’s dangerous to believe that ‘it’s different this time’,” said Mr Slater.

“But what is more dangerous is to believe that everything will revert eventually to a mean.” He argued that firms such as Amazon, Facebook and Google, and Chinese rivals Baidu, Alibaba and Tencent, were positioned to deliver much more rapid growth.

“Isn’t it astonishing that after all this time Amazon has no big, cross-border competitor?” he asked. “Amazon’s shopfront just gets better, its delivery and service get better, and yet it still has a tiny fraction of US market share. Why won’t that grow?”



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