Technology breakthroughs herald a new era in the way we live, work and relate to each other. Five key trends explain why investors should consider holding technology stocks.
The global technology sector is hardly overlooked. Technology breakthroughs in fields such as artificial intelligence, robotics, the Internet of Things, autonomous vehicles, 3D printing, nanotechnology, biotechnology, materials science, energy storage and quantum computing are celebrated as heralding a new era. They are changing the way we live, work and relate to each other.
Some of the US mega-cap stocks’ valuations are already discounting many years of strong growth. Yet other companies standing to gain from technology’s revolution have more reasonable valuations. Among these are the mid-cap component makers in the industry’s supply chain. Many of them have typically been ignored by Wall Street investors, despite sustainable earnings growth.
Here are five trends explaining why investors can benefit from holding technology stocks in their portfolios:
1. Growth of cloud computing
As content streaming and ecommerce grows exponentially, so the large cloud data centres built to accommodate them must keep adding capacity, and have to maintain good security. The data centres require lots of storage, which means lots of solid-state drives (SSDs). They are replacing disk drives, but even the SSDs must be replaced frequently because they have only so many write-and-erase cycles before they become less reliable.
2. Semiconductor consolidation
The wave of mergers and acquisitions in semiconductor manufacturing has made companies more profitable, similar to how consolidation affected the airline industry. Furthermore, Moore’s Law – which predicts that the number of transistors in a dense integrated circuit doubles every two years – is slowing down. This means that the leading-edge chips are no longer getting cheaper. In many cases, they are getting more expensive. That’s a new industry dynamic, and it’s very positive for the semiconductor industry. In line with the change in the sector, Samsung Electronics appears to have changed its management philosophy and is now more focused on profit than market share and killing off competitors. Playing cloud computing and the Internet of Things, and other trends, through semiconductor stocks provides more bang for buck than internet and software stocks.
3. Smartphones get more expensive
Smartphones are in danger of becoming boring. Yet although sales growth is slowing, the average phone is getting more expensive, so the dollar content of chips in those devices keeps going up. There is more memory per phone, better Wi-Fi capability, and biometrics, or 3D sensing. All that content is not slowing down, even though unit volumes aren’t growing that much. These are positive trends.
4. Rise of alternative intelligence and machine learning
Think about artificial intelligence and machine learning, not to speak of cloud computing. They all need cheap memory, and huge quantities of it. Alternatively, look at advanced driver assistance systems for cars – some of those vehicles have 24 gigabytes of DRAM (dynamic random-access memory).
5. Earnings reliability
The growing demand for technology is feeding through to company earnings. Earnings are growing and there have been few recent examples of companies missing their quarterly forecasts. Most parts of the sector have been reporting strong fundamentals, including software, the semiconductor sector and especially internet stocks.
That said, not every technology stock is destined for success. Some of the older technology companies have declining sales, while a few newer ones are trading on high valuations and burning through cash with business models that are not sustainable. It’s a question of being selective.
Overall, the picture is positive for technology stocks. As Paul Wick, the Silicon Valley-based veteran fund manager who runs the Columbia Seligman technology funds said in a recent interview: “Fundamentals appear to be in excellent shape and the future has rarely seemed brighter.”
Themes that will change our lives such as artificial intelligence, autonomous driving and cloud computing appear likely to drive strong investment returns at many of these companies.