The extensive changes in how we work, consume and communicate over the last few years have augmented disruption from information technology. This is propelling advances in, for example, cloud computing, the internet of things, content streaming and artificial intelligence.
The abrupt – and forced – transition to more socially distant lifestyles has sparked booming demand for technology and innovations to support virtual, online and cloud solutions for many everyday interactions. When it comes to working from home, the widespread adoption of remote working is unlikely to be reversed significantly once the pandemic abates fully.
The pandemic has also given rise to an uptick in automation, particularly in service industries where, initially, social distancing kept many workers away from the workplace for months and where later worries about being infected at work extended absences.
E-commerce has mushroomed, boosting web advertising and electronic payment services. Significantly, it has created a boom in physical and automated warehousing and home delivery.
More companies can be expected to integrate their physical and online channels; augmented reality help provides for an easier and more enjoyable shopping experience; and pricing adjusted dynamically for consumer demand looks set to boost earnings and revenues.
Five trends shaping the future of ecommerce; source: Logiq, via Visual Capitalist; Oct 2021
The promise of extended global internet coverage
Big data, artificial intelligence, data analytics and cybersecurity are all now seen as essential tools to help overcome the complex economic, demographic and societal problems that many sectors face. The digital transformation has become inevitable across society, and nations need to act to prevent the digital divide in their populations from widening.
As with each iteration of the digital evolution, 5G tech is set to transform how we use technology. Its superior speed and scale is expected to open up the market for smart connectivity in homes and businesses further, as well as involve the greater use of big data, AI and the automation of vehicles.
The USD 1.2 trillion bipartisan infrastructure bill in the US could be another catalyst. The provision of satellite broadband is well under way and promises to extend global internet coverage to rural and remote areas that are currently not well served. This would be transformative for communities particularly in the developing world.
With regulators scrutinising each company, so should investors
Globally, the tech sector faces increased regulatory scrutiny concerning data privacy and security and the monopoly power of some of the largest platform providers. China has seen increased tensions between the government and several tech giants in this area.
In the US, the issues have bipartisan attention and regulatory efforts are gaining momentum. The proposed legislation would usher in sweeping changes both in the way anti-trust regulations are enforced and in how companies run and supervise their platforms. The commercial impact on profitability may vary considerably among the affected targets, so we believe fundamental analysis of individual companies is crucial to assessing the impact on investment cases.
Less stimulus may equal less semiconductor demand
Another concern could be the persistent supply chain shortages and disruptions. These may continue to affect operations for technology companies, particularly those that provide physical goods. Adding semiconductor supply will be slow due to the time it takes to build and equip new factories. It will also take time for companies and countries to resolve the constraints on shipping and logistics.
However, we expect semiconductor demand to moderate with less consumer-oriented stimulus. Some of the constraints should lift as the year progresses, resulting in supply progress.
Short-lived – Tech underperformance due to higher rates
What of inflation and higher interest rates? Potential weakness in bond markets poses a risk to higher growth technology names with longer-term future discounted cash flows. In the event of protracted above-trend inflation, tech stocks could underperform, but we expect this to be short-lived given the strong growth trends centred on areas such as cloud computing, automation and the Internet of Things.
We seek to mitigate the risk of inflation and higher interest rates through managing position sizes and by balancing high-growth, high-valuation names with investments in more stable growth companies with compelling valuations.
Tech sector relative valuations are currently higher than historical norms in some areas, including high growth software. However, we believe the sector deserves a premium multiple versus the broader market due to its improving returns on invested capital (ROIC) and its superior growth prospects.
More spending on cybersecurity, cloud migration, collaboration tools, data analytics
We expect persistent strength in IT spending and in industrial and car sector demand for chips and components. Experts predict robust global IT spending will moderate, but remain at a high level of growth in 2022. Gartner forecast 9.5% higher corporate IT spending globally in 2021, followed by 5.5% in 2022 (October 2021, Gartner Inc.).
Based on surveys of IT professionals, top spending areas include cybersecurity, cloud migration, collaboration tools, and data analytics. These areas line up well with our view on the top secular growth themes and foundational technologies.