James Dennin, Kapitall: Some institutional investors say tech stocks aren't worth the risk. But Ryan Jacob disagrees.
A couple weeks ago we interviewed John Thompson of Vilas Capital. A by-the-books value investor, Thompson likened investing in technology stocks to "sitting on a twenty and betting on an ace." But there are all kinds of investors out there. Including ones who would say pretty much the opposite.
Read more interviews from Kapitall: John Thompson Says to Ditch Tech, Buy Big Banks
So we sat down with one, Ryan Jacob, Chairman & Chief Investment Officer of Jacob Asset Management, to talk about how his fund goes about picking technology stocks, and how they weigh growth potential against valuation.Why do economic downturns affect technology companies more? Supply and demand on the hardware side is still susceptible to consumer sentiments. But we do really look for secular growth, companies that'll grow regardless of what the market is doing. There are some companies we like a lot and invest in, like Yelp (YELP), but we keep our holdings small because of the valuation. Yahoo! (YHOO) is also tricky to value because so much of that company's value are Asian assets – like Alibaba and Yahoo! Japan. Click on the interactive chart to see stock price data over time. Do you think the market has priced in the Alibaba hype to Yahoo!'s valuation? Not completely. Because those assets, they're not static, they're growing. I don't see Yahoo!'s price getting ahead of itself, in fact I think that it's tracking. I think most of our holdings are going to catch up to their valuation. So valuation plays a role in determining what you buy? The name of the game in technology investing is balancing risk and return. One of our holdings, Cisco (CSCO), isn't growing that much but it is something of a value play. Now I'm not going to pay a Yelp kind of valuation for a company like Cisco, but, for sure, valuation plays a big role. What do you think of Twitter's IPO and valuation? With Twitter (TWTR) I'd argue that it behaves more like a utility. It's scope is much more narrow than most software companies which can be good and bad. Their position is much safer than a typical technology company, I don't see anyone else getting into it, but their position is also narrow. It'll be harder for them to grow. But then again, we're always careful with IPOs. They're priced to sell, not to buy. So would you caution against investing in IPOs all together? It's hard to say because sometimes they just keep going up after, but sometimes there's a lot to be gained by taking your time. We waited about 8-9 months before we bought Facebook (FB) which is one of our biggest holdings now. We knew that no one had a deeper relationship with their users but the question became 'could they utilize it without becoming intrusive.'" We think that they can. There's always a chance they could be displaced, just like Myspace was, but we don't think that's going to happen any time soon. Do you believe in Zuckerberg's philosophy of product before profit. Absolutely. It's important to nurture your platform until you reach a critical mass on your user base. Focusing on short-term profits before you get there is short-sighted.
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