Clouds are gathering across Silicon Valley.
From Apple (NASDAQ:AAPL) and Amazon (NASDAQ:AMZN) down to cult favorites like Roku (NASDAQ:ROKU) and Square (NYSE:SQ), high-tech heavyweights have warned that growth is slowing. Frankly, they can’t justifiably blame trade policy, interest rates or even a strong dollar for this phenomenon.
Across the technology sector, sales for 2019 are still tracking at levels that I had anticipated earlier this year. There haven’t been any shocks to the system.
Forget smartphones and electronic payment systems. You can even forget about electronic commerce. Companies that became Wall Street stars by capturing those now-mature markets will remain adrift until the next revolutionary product emerges.
And with even the most advanced computing functions like artificial intelligence finally starting to get traction within the global enterprise, it’s clear that too many vendors are fighting for a limited population of early adaptors. Competition is fierce, profits are elusive and valuations, even for companies that have achieved profitability, are stretched to the limit.
Of course, there are exceptions. Stocks that have moved to the new “communications” sector are still growing fast. I think Alphabet (NASDAQ:GOOGL) is grossly underrated right now. Revenue is set to ramp up four times as fast in 2019 when compared to what the average traditional tech company can deliver.
But in general, a conventional computer company now needs truly compelling numbers to earn a space on my GameChangers list. You’re not going to make the cut if sales are edging up just 5 percent a year and efficiencies of scale unlock another 4 percent growth on the bottom line.
I’m looking elsewhere. My subscribers are doing very well with rapidly expanding retail concepts, one of which is tracking 12 times earnings growth, such as a faded favorite like Facebook (NASDAQ:FB).
That’s pure brick and mortar. Nothing fancy, nothing digital. The website doesn’t offer much to see. However, the stores are clustered in economically vibrant corners of the heartland that the big chains have overlooked.
The moral there is as simple as it gets. You don’t need to put all your eggs in the Amazon cart. Amazon is growing fast, but it’s also priced for hyper-growth. How many times a year can Jeff Bezos raise Prime fees before his captive market defects?
On a percentage basis, mighty Amazon is growing sales only 3 percent faster than that little company I introduced to my subscribers a few months ago. The only differences are scale and valuation.
Our little heartland chain store trades at 28X forward earnings and only needs to capture $10 billion in sales next year to justify that multiple.
Jeff Bezos needs to pour $280 billion into his perpetually hungry shark of a company to keep Wall Street satisfied. Failure up here at 77X earnings won’t be forgiven.
Biotech is the new Tech
In the meantime, biotechnology has taken over the truly disruptive potential that a lot of technology stocks provided early in their corporate evolution. Like computing in the 1990s, new medical therapies can take shareholders from zero to billions and generate real wealth along the way.
The valuation math here is as simple as it was when Apple was a dream coming together in Steve Jobs’ garage. At the startup stage, even the best ideas are rarely worth much more than paper. It takes hard work and business acumen to develop them into real businesses.
As that hard work proceeds, value is created. The paper promise gets closer to coming true. These companies are speculative until they have something to sell, but progress reduces the risk and accelerates the ultimate reward.
For biotech, that means turning theoretical research into a treatment that improves lives. The process of getting from research to commercial reality is set by the Food & Drug Administration (FDA).
Every step in the FDA process takes early-stage investors closer to the moment of truth. When that happens, growth rates shoot to shocking levels. That’s the kind of rocket trajectory dot com investors rode in the 1990s. I loved the days when a little stock like Amazon could double almost overnight.
But those days are over. Computers are entrenched throughout everyday life now and even electronic commerce is part of the broader commercial landscape. The biotech stocks scattered throughout my investment universe are the Amazons of tomorrow.
When the FDA approves a drug for active use, we cheer. The company that made that drug reaps the rewards. As shareholders, we do too. And the world beyond our portfolios changes as well.
