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Templeton bets on loyalty upside from tech platform demand
TEMPLETON'S co-manager of the Franklin Technology Fund sees value in Apple stock, and has been accumulating over the last six months on hopes that the committed base of users in the US will stick with the technology giant as it ramps up on its associated products and services.
The latest launch of Apple's iPhone X - the dearest phone offering from Apple yet - is an experiment on pricing, even as Apple has been moving users from paying upfront for a phone, to tying phone purchases to a subscription line, said Templeton's Jonathan Curtis at the sidelines of the Franklin Templeton's Asia-Pacific investor forum held in Ho Chi Minh City, Vietnam.
"If you look at the actual portfolio, they are going up and down the price scale," he added.
This signalled that the technology titan is moving to segment its market. The total iPhone installed base is expected to have hit some 700 million units, including about 200 million of second-hand devices, an estimate from BMO Capital Markets as cited by Fortune magazine showed in March.
Apple is among the top 20 stocks in the Franklin Technology Fund, though to be clear, the top 10 stocks in the portfolio alone make up just about 30 per cent of the total. As at July 31, its single-largest holding is in Facebook Inc, but at under 4 per cent.
Mr Curtis expects Apple to be able to drive down the cyclical pressures in the business. "The key for Apple is to get their users to buy not just a single product," he said, pointing to the latest Apple Watch as a potential cross-selling boon.
But he concedes that it is not yet certain whether Apple can keep up the same retention strategy in China, which is possibly still the largest iPhone market in the world. A report from 2015 from the Chinese government estimated there to be about 130 million iPhone owners in China, more than the 100 million iPhone users in the US that year, a report from Quartz Media showed.
In a winner-takes-all environment of technology investments, the Franklin Technology Fund is broadly positive on platform companies with dominant positions that benefit from access to customers' data and the potential application of artificial intelligence. The fund, which has net assets of US$1.3 billion, has Alibaba, Amazon, Alphabet Inc, Microsoft and Salesforce.com among its top ten holdings.
"Investors make the mistake that cloud infrastructure is going to be a commodity. We see it as precisely the opposite," said Mr Curtis, noting that such platforms take "energy" from the data of their users, and as developers build skills and products around such cloud services, the stickiness of cloud-platform users increases.
He also pointed out it's still early days for cloud infrastructure, with the market expected to hit more than a trillion dollars over the next five years or so. Amazon, as a top player in the cloud services arena, is gaining traction from supporting startups.
Mr Curtis is positive on Alibaba's cloud business as well, despite it having a smaller scale than Amazon for now. "I think they benefit from being a China-based company. The government is eager to have a winner in that category."
Large companies that are facing disruption are also gearing up to transform the business, by going on the cloud, raising the potential for cloud-platform companies further.
That being said, the fund is wary of the rising regulatory risk, pointing out that players such as Alibaba are aggregating massive amounts of data. 'There's a reason it's not 10 per cent in the fund," he said.
"I worry most about a black swan, or an unanticipated risk, both in China and Europe," he said. "Certainly we've seen Europe being aggressive on Google. We watch it (but) that risk is offset against reasonable valuations." He added that lawmakers in the US are also waking up to risk of data aggregation with the recent Equifax data breach.
Mr Curtis is also less positive on the data centre business, due to its commoditised nature. "They're motels for servers."