Why B2B tech will drive the next tech cycle

After consumer technology drove the previous tech cycle, the Spear Alpha ETF is tracking the wave of growth business-to-business development is expected to bring in. Spear Invest Founder and CIO Ivana Delevska joins Yahoo Finance Live to break down the outlook on cybersecurity and AI adoption for large businesses.

Video transcript

RACHELLE AKUFFO: Spear Alpha is an ETF listed on the NASDAQ. The company behind it, Spear Invest, is an asset manager specializing in positioning investors throughout the industrial technology sector. They think that while consumer tech drove the past tech cycle, business-to-business technology will drive the new bubble in the space.

We're joined now by Spear Invest founder and CIO, Ivana Delevska, to discuss more on this. Good to see you, Ivana. So talk about how this is going to play out in terms of business-to-business and tech.

IVANA DELEVSKA: Well thanks for having me, Rachelle. So what we saw over the past 10 years or since the dot-com bubble is the real winners being in the consumer technology sector. So this is really the first area that technology made the transformational change. So this would be areas like streaming, social media, et cetera.

We expect as we look forward, especially with the advancements in AI, B2B technology is going to be a much wider market. So this would impact traditional industries from machinery, industrials, life sciences. Basically, every industry you can think of where there has not been enough technology embedded is going to be transformed by what we are seeing in the latest innovations and trends.

- So let's break down some of those sectors because even within AI-- obviously, every company and its mother is coming out with some sort of AI product or service. How do you determine which are the ones that are really worth pursuing?

- Rachelle, we have an active product that's really based on fundamental research. So we really dig deep inside of the value chain to understand who is providing what services, who is well positioned. So if we look into AI, there is definitely a buzz affecting every company that has anything to do with AI. And what we do here is parse out which ones do we think are going to be the long-term winners versus are just hype.

And here, I'll point to a few areas down the supply chain or value chain that we don't hear a lot of investors talk about. We all know about the hardware side. So this would be companies like Nvidia, AMD. Those are going to be the obvious place and we do think there is fundamental support, even here, behind those. But if you look deeper, AI is really a data problem.

And we believe that data infrastructure, cloud Infrastructure, is going to be a big beneficiary of AI going forward. And these companies are still trading at very depressed valuations because of the optimization that we've seen in cloud spent caused by the recession.

- And we know that with the rise of AI, we're also seeing more of a push in cybersecurity. What are some of the names that you think people should be paying some attention to there?

- That's right, Rachelle. So it's going to be very interesting to see. As you see more AI workloads, you're going to see also more AI threats. And the interesting thing in cybersecurity is that over the past five years, we've developed some pretty solid AI-based cyber threat solutions. So what this means, though, is that now the threats are going to become AI-based and you're going to need constantly improving products and solutions.

As we have more data, processes are different. The way you do analyze the data-- that we process the data is going to be different. So you're going to need a whole new set of cyber solutions. And we believe the cyber cycle is just that early innings of development here.

- And for some people who are looking at some of the valuations in the tech space here, how does that compare with some of the ones that you're following in the B2B space that people should be looking at?

- Well Rachelle, B2B tech will be a subset of broader technology. And I can speak to broader technology trends. Basically, what we've seen in B2B software, for example, valuations were as high as 20 times EV-to-revenue at the peak of the cycle, right? So two years ago, you had companies trading at 20 times EV to next 12 month revenue.

Now, those valuations reset lower to five times at the bottom. So what we've seen over the past six months is a slight uptick to six times. So while it seems like the moves are large, they're really off of very depressed levels. So valuations here are still attractive. However, we don't believe the next leg up will be driven by valuations.

We think here, valuations are going to stabilize. And the next leg up will really be driven by earnings inflection.

- So then, how do you play that out when you have the Fed in a pause-and-skip mode at the moment? And you're trying to parse out what you should be looking at for perhaps the next six months.

- So we're really looking at companies that are going to have earnings acceleration. The first one will be semiconductors, right? Those are early cycle. And we see the inflection as early as 2Q of this year. So companies like NVIDIA, for example, that are particularly well positioned.

They were able to post some really outstanding results, basically increasing guidance 50% above consensus and analyst estimates raising 40 plus percent in the out years. So we're really seeing this early cycle, then translate into later cycle areas like cloud spending, like cybersecurity. Because basically, once you get the chip, what are you going to do with it, right?

So these hyperscalers are investing in this hardware infrastructure, but then they're going to be selling these services to third parties. And we think that's going to drive the next earnings cycle and earnings boom.

- And as people await this inflection point, for people who are new to getting into B2B tech, what are some of the risks that you're also being mindful of?

- So there is always risk in technology, right? It's a pretty volatile space. There is some interest rate risk going forward. If rates increase for example, from 4% for the 10-year to 6 plus percent, you will see valuations put a ceiling on the earnings' upside trajectory.

There is also a lot of times, the main risk here is not doing proper analysis and not really understanding what companies are benefiting from breakthrough trends and what companies are actually could become obsolete. So we see when they're-- in times where there is a big technology change like this generative AI, we see it creating a big set of winners but also a big set of losers. And you don't want to be with the losers.

- Indeed. Well, thank you so much to Spear Invest founder and CIO, Ivana Delevska. Thank you for joining me this morning.