This article first appeared in Capital, The Edge Malaysia Weekly on December 30, 2019 - January 5, 2020

TECHNOLOGY companies have come back in favour with investors in the last decade. And unlike the dotcom era of the late 1990s, the bottom did not fall out.

Perhaps the difference between the tech sector in the 1990s and 2010s is that investors this time have a better understanding of the tech stocks they are buying.

The previous dotcom era saw investors rushing to get in without checking the fundamentals, business models and financial performance of the tech companies.

In fact, when the dotcom mania reached Malaysia’s shores, a number of companies renamed themselves as dotcoms. They also announced all sorts of internet-related ventures, and this was happily lapped up by punters to send stock prices soaring.

The bubble eventually burst in March 2000 after many companies failed to get off the ground, let alone generate a profit, leaving many investors facing steep losses.

Fast forward to the 2010s and expectations of exponential growth in the demand for semiconductors due to the growing deployment of artificial intelligence and the Internet of Things has once again created keen interest in the tech sector.

In fact, companies with compelling technology and business models such as, Facebook, Amazon.com , Apple, Netflix and Google parent Alphabet have been grouped together as the co-called FAANG stocks.

And as smartphones become an integral part of our daily lives, there has been clear evidence of growing demand for semiconductor and semiconductor-related products and services.

Therefore, investors are bullish about the tech sector’s prospects, mainly due to its long-term earnings sustainability, underpinned by the diversification of products and customer base. The internet and digitalisation have created a lot of new businesses, raised productivity and made thousands, if not millions of people wealthy.

 Reuters says in a Dec 23 report that the “FAANG-tastic Five” is one of the 10 trends that have upended traditional economic and investment models in the past decade.

If the FAANG companies were a country, they would be the fifth largest in terms of economic output, outgunning the UK and snapping at Germany’s heels, the report says.

“With a US$3.9 trillion market value (versus around US$100 billion in January 2010), Facebook, Amazon.com, Apple, Netflix and Alphabet are not only at the vanguard of history’s longest share bull run but have transformed how humans work, shop, consume news and relax,” says Reuters. “And in the slipstream of the five pioneers, other tech titans are rising, from China’s BAT grouping of Baidu, Alibaba and Tencent to sector disrupters Uber, Airbnb and Deliveroo.”

For perspective, FAANGs comprise 7% of the MSCI global equity index today, up from 1.6% in early 2010.

Closer to home, semiconductor and semiconductor-related companies listed on Bursa Malaysia have ridden the tech wave in the last 10 years.

This is evident from the 10-year performance of the Bursa Malaysia Technology Index, which has more than doubled from 18.36 points in December 2010 to close at 37.69 points last Thursday (see line chart).

Penang, the bedrock of the country’s tech sector

Since the 1970s, Penang has attracted multinational corporations (MNCs) such as Advanced Micro Devices, Agilent Technologies (formerly Hewlett Packard), Renesas, Intel, Osram and Robert Bosch to set up their manufacturing facilities.

This has spurred homegrown outsourced semiconductor assembly and test (OSAT) companies such as Unisem (M) Bhd, Globetronics Technology Bhd, Inari Amertron Bhd and Malaysian Pacific Industries Bhd (MPI) that provide outsourced services, including assembly, packaging and testing, to the MNCs.

The OSAT companies and other MNCs, in turn, created a need for automated test equipment manufacturers such as ViTrox Corp Bhd, Elsoft Research Bhd, Aemulus Holdings Bhd, MMS Ventures Bhd and Pentamaster Corp Bhd.

The third group of companies that have emerged nationally include the likes of JF Technology Bhd and FoundPac Group Bhd, which design and manufacture high-performance test sockets and other materials for OSAT companies and semiconductor firms.

So successful has Penang been as an electrical and electronics (E&E) hub that it is being touted as “The Silicon Valley of the East”. The E&E sector also contributes significantly to the domestic economy.

In the new decade, most tech companies are banking on the automotive segment to drive future growth.

Having relied for over a century on the internal combustion engine, the global automotive industry is being upended by battery-powered cars. Hundreds of billions of dollars have been pledged to develop a new generation of electric cars.

It is said that the car will become “the world’s biggest mobile device” in the future, with the automotive sector driving the electronic devices needed in the world. In addition, cars will need a lot of sensors as the future of the sector is all about autonomous driving and going electric.

This presents huge opportunities for semiconductor-related companies whose stocks have risen in the past decade. For those who are excited about the optimistic outlook, any correction presents an opportunity to accumulate shares of these locally listed tech firms.

As smartphone manufacturers are gearing up for their new devices to hit the market almost every year, those supplying inputs such as semiconductor chips, processors, sensors and wireless components are in for a good run.

With more advanced features to be incorporated in the development of new smartphones and other devices, semiconductor players and those along the supply chain might also benefit from higher sales orders.

Take Pentamaster Corp Bhd, for example. It has delivered a strong earnings performance in recent years, mainly contributed by the strong demand for the group’s smart sensor test equipment and solutions, particularly from the telecommunications segment.

This is given the increasing prevalence of the smart sensors adopted in the latest smartphone upgrades, as well as smartphone peripherals that include wearable items, such as wireless headphone products and watches.

Another catalyst for the growth of the semiconductor industry is the development of smart devices and electronic components for the healthcare and automotive industries.

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