Capturing opportunities in the IT sector

Funds Management

by Clive Tompkins

Intermede Investment Partners Technology Analyst James Kim talks to NAB Asset Management Portfolio Specialist Sinead Rafferty about the strength in Electronic Arts and Facebook. James talks about improvements Facebook is implementing following the Cambridge Analytica data breach and in the case of Electronic Arts how its unique position with sporting associations means it is able to capture more gamers and keep them playing as they get older.

Sinead Rafferty: Welcome to the Intermede Investment Partners Update. I'm Sinead Rafferty, Portfolio Specialist at NAB Asset Management and I'm joined by James Kim, Technology Analyst at Intermede. Welcome, James.

James Kim: Thank you.

Sinead Rafferty: You've recently moved back to the US from the UK and are based in San Francisco. How does that help you in terms of your coverage of the tech sector?

James Kim: Well, technology for us is a global investment process. We're looking for companies all over the world. But typically what we found in recent years is that there's been a nexus or a centralisation of new business models being developed in the Silicon Valley. It's very natural for the technology space. We believe that moving to California would give me a chance to be closer to the companies, closer to the management teams, closer to the trends that are influencing the way technology is impacting the world globally. I thought we'd have a better research effort by being close to and co-locating next to the businesses that we might want to invest in.

Sinead Rafferty: And one of those businesses is Facebook. Can you tell us a little bit about the thesis behind inclusion of that in the portfolio?

James Kim: Sure. We believe Facebook is a uniquely powerful business in today's digital age. The company is the largest social network in the world with over two billion active users on the platform monthly. That's in North American, Europe, Asia, Latin America, and in Africa. From the user base the company's able to generate more than $20 per person on average every year for advertising. That's an incredible business that has still long runways for growth as the company expands into different geographical regions, but also different platforms. You think of Facebook as the Facebook app itself, but the company also owns the Instagram platform, the Whatsapp platform, and the Facebook Messenger platform, each of these with a very large unique user base that can continue to generate revenues going forward.

The company this year has had some troubles, given the revelation of the Cambridge Analytica data breach, which has put the spotlight on the company to think about how it protects the data of its users and how it protects the integrity of its platform. We believe that management is now taking the right steps to do that. The company is investing heavily in new techniques, including artificial intelligence and machine learning, in order to edit and control the quality of the content on its platform to make sure that there are no dangerous or potentially nefarious or ill-intended contributors to content on the site. The company is also taking a much more severe look at how it protects data for its users, and has now decided to eliminate much of the third party sharing that has been at the source or the core of the challenges that are faced with Cambridge Analytica.

Because of this, we believe the company is going to be well positioned to continue to grow in the future by preserving the quality of its platform, by making sure that users, advertisers, and even regulators are all comfortable and feel secure when they're on the Facebook website or Facebook app. Because of this, it remains a core part of our portfolio, and we continue to believe that it's going to be an upside opportunity by owning the name.

Sinead Rafferty: Thanks, James. What about other stocks within your sector? Is there another one that you think is worth mentioning today?

James Kim: Sure. One of the companies that we've recently added to the portfolio is Electronic Arts. Electronic Arts is a US-based video game software developer that's particularly focused on sporting games. So that includes the NFL for American football, but also FIFA for global football. We believe that the video game industry is a very attractive place to be when thinking about the different media platforms that exist in the world today. The average age of a video game consumer continues to rise. The amount of time that people spend playing games, whether that's in front of a TV with a console or if it's an app on your smartphone, the time spent on video gaming as an entertainment form continues to rise.

We believe Electronic Arts is well positioned for that because it has strong licensing arrangements with all the major sports leagues around the world so that it's in the sole position to produce exclusive content that really cannot be replicated by other competitors. Because of that, we see a long runway for growth as the company continues to expand into new sports categories, and then into further geographic expansion as well. Because of that, we think Electronic Arts is well positioned to be to continue to compound growth in the future and deliver returns for shareholders.

Sinead Rafferty: Thank you so much, James, and thank you for joining us. If you're interested in finding out more about Intermede, it's available on the website where you launched this video.


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