Technology Sector Additions

 
Asset Management, Companies and Industries, Investment Themes October 24, 2018

Technology Sector Additions

We had a quiet third quarter, making only a few small changes within our technology sector. We added a position in Microsoft Corp (tkr: MSFT). Microsoft is the second-largest holding in the S&P 500, making up about 3.4% of the index. Under leadership from CEO Satya Nadella, Microsoft has developed several profitable, fast-growing revenue streams, particularly in the cloud. “Commercial Cloud” revenue, which includes Office 365, Dynamics 365 and Azure, has been growing about 50% each year, and currently is roughly $7 billion. We believe that Microsoft has emerged as a clear winner alongside Amazon in the cloud. As the transition to the cloud continues, Microsoft should continue to benefit from its leadership position. Microsoft cloud revenue is growing much faster than its competitors, as it continues to gain market share.

Furthermore, we like the $7.5 billion acquisition of GitHub that was announced in June of this year. GitHub is a community of 28 million software developers who contribute code to more than 85 million open-source software projects. We think this was a smart acquisition by Microsoft, as it should help fuel Azure growth going forward. Alongside the increasing revenue growth over the past several years, Microsoft’s valuation has risen. We decided to buy a 2% position, smaller than the market weight, given the rise in valuation. If we see this valuation decline or if we recognize further growth potential at the company, we could look to add more.

We added to our position in Qualcomm (tkr: QCOM) ahead of several possible positive catalysts for the company. Qualcomm has been entangled in a mess of regulatory fights, a bitter legal battle with Apple, a failed hostile takeover attempt by Broadcom, and roadblocks in its own acquisition of NXP Semiconductors. However, in the last few months, we have seen resolutions to many of these issues. Most of the regulatory bodies across the globe challenging Qualcomm’s business practices have concluded their investigations and Qualcomm has paid the corresponding fines. The takeover attempt by Broadcom was ultimately blocked by the Trump administration in March. Qualcomm officially abandoned the purchase of NXP Semiconductors in July after Chinese regulators held up approval of the deal as part of the larger trade conflict with the U.S.

Following the termination of the acquisition, Qualcomm announced a $30 billion stock buyback program and mapped out a plan to diversify its revenue beyond the smartphone market. The legal battle with Apple remains an overhang, but there are several upcoming legal events that should steer the two companies toward some kind of resolution. Even if the outcome of a settlement or trial is not 100% a win for Qualcomm/loss for Apple, we think that a conclusion to this fight will overall be a positive for the stock.

Individual investment positions detailed in this post should not be construed as a recommendation to purchase or sell the security. Past performance is not necessarily a guide to future performance. There are risks involved in investing, including possible loss of principal. This information is provided for informational purposes only and does not constitute a recommendation for any investment strategy, security or product described herein. Employees and/or owners of Nelson Roberts Investment Advisors, LLC may have a position securities mentioned in this post. Please contact us for a complete list of portfolio holdings. For additional information please contact us at 650-322-4000.

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