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Wellington Management Hong Kong Ltd
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The views expressed are those of the author at the time of writing. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed.
As we begin 2022, the weakness in the consumer technology sector continues. Two-thirds of internet stocks currently trade 30% lower than their 52-week highs, with many down more than 50%. 1Amid this sell-off, our conviction in the long-term outlook for tech in general and consumer tech in particular remains strong. The key question is whether this market presents an opportunity to buy the dip or if investors should remain patient as the pullback could persist. Adding the Omicron variant to the mix further complicates the outlook for the consumer technology sector.
However, we think technology’s long-term secular tailwinds signal that the recent sell-off could be a significant opportunity to selectively add to high-conviction ideas. Critically, we believe this environment makes active management especially important as the opportunities and risks are very company and segment specific. While this may be an opportunity to buy in some areas, we think it is essential to pick spots carefully as other segments could see lower entry points ahead.
The above headwinds impact different parts of the consumer technology sector in varying ways. For instance, while the surge in COVID infections brought on by the Omicron variant may temporarily hinder travel-focused tech companies, digital entertainment may once again see increased engagement. Today’s environment creates a lukewarm outlook for the sector in aggregate in the near term, but we believe there are still areas with significant upside potential.
Below, we highlight long-term opportunities we find compelling, outlining some company- and segment-specific factors that could drive growth in 2022 and beyond.
Potential “stay at home” winners
If we do return to a more “stay at home” environment due to Omicron, the gaming sector is one key potential beneficiary. Notably, many of these stocks currently trade at pre-COVID valuation levels (after rising sharply at the height of the pandemic). We believe it is crucial in this space to focus on the long-term growth potential of companies with strong intellectual property, experienced teams, and the ability to increasingly monetize their IP. In our view, the market is discounting some compelling names in this sector much more than warranted given their strength on these factors, particularly if COVID cases keep rising.
Opportunities for “going outside”
In contrast, the key players in online travel could see the short term dominated by Omicron. However, as travel recovered in 2021, we saw a glimpse of the long-term opportunity for one leader in the sector as it delivered profits well ahead of expectations. Although the COVID surge is a short-term challenge, we believe companies such as this may have substantial long-term growth potential, especially given the recent pullback. Notably, in 2021, leaders in “going outside” themes like travel and rideshare apps continued to diversify their offerings with growing business lines geared toward staying at home (e.g., online experiences and food delivery).
Online dating apps
Online dating apps may offer another opportunity in the “going outside” theme despite the short-term challenge from Omicron (which makes many people reluctant to meet prospective dates in person) and the current app store fee environment. We have a high degree of conviction that the fee landscape will break (reducing fees), and leading online dating app companies could be key beneficiaries. In addition, we believe these same leaders have the ability to unlock additional monetization opportunities throughout 2022 from recently launched features.
Advertising amid new data privacy rules
Beyond COVID, digital advertising has been significantly impacted by Apple’s new data privacy rules. Companies are currently adapting to this new environment at different paces. In social media, for example, although this policy change is a headwind for the sector, leading companies are making faster progress adjusting to the rules than their peers. In addition, as e-commerce growth stalled at the end of 2021, we believe it is critical in this space to focus on the companies that have differentiated engagement, innovation, and the ability to monetize new areas.
We think the long-term case for consumer tech remains robust despite the cautious near-term outlook for the sector. In our view, it is essential for investment managers to identify the companies and segments that are best positioned to navigate this rapidly evolving market. We believe this makes active stock selection critical to finding opportunities (and avoiding risks) amid the sell-off and adding to high-conviction ideas that can drive long-term returns.
1Source: QNET Index. Data as of 7 January 2022.
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