Technology has been the best performing sector for the past 10 years1. This outperformance is attributable to superior fundamentals. In the past decade, tech has had the best earnings growth and profit margins2,3. This has naturally translated into higher stock prices.
The coronavirus has been the cherry on top. Thanks to social distancing, more people are working from home, shopping online and using online entertainment. This has brought forward years of technological adoption. But which companies may stand to benefit? Below we look at some of the bright lights.
The companies listed are all found in the ETFS Morningstar Global Technology ETF (ASX Code: TECH).
Five companies fuelling the transition
One of the biggest companies on the planet, Microsoft may seem like an obvious choice, however much about Microsoft’s growth story is less-than-obvious. The company has seen a dramatic turnaround under the leadership of Satay Nadella. Under his guidance, Microsoft shed Nokia, branched out into social media with LinkedIn, adopted the subscription model, and embraced open source. The future also looks bright as Microsoft has footholds in major growth themes. Thanks to Xbox and other intellectual property like Age of Empires, it has a foothold in eSports and competitive video gaming. Thanks to Azure, Microsoft is a dominant player in cloud technology. Thanks to Teams, it is the incumbent for the 'work from home' theme. Microsoft has a lot going for it.
One of the top dogs in cybersecurity, whose name is synonymous with “firewall”, Palo Alto Networks has been dealt a win by the coronavirus, with revenue growing 25% year-over-year as of February 2021. Before the coronavirus, companies and governments could manage cybersecurity more easily. They could, for instance, have simple rules where only IP addresses within their buildings have access to their systems. Now, staff and clients need to log in from anywhere thanks to remote work and social distancing, so cybersecurity has become much more complicated. The group is also transitioning away from hardware and towards software instead, with a positive analyst response.
A pioneer in virtualisation technology. Virtualisation is where you create a version of an app or desktop from one central computer or server. It is what many cloud providers do. It is useful for businesses as it can give IT teams control over who gets access what resources on which device. With all data stored in a central centre the risk of cyber-attack is reduced, as staff don't hold data on their personal equipment. The company missed guidance recently, leading Morningstar to judge it as oversold.
VMWare has fallen out of favour and Morningstar believes it could be undervalued. Historically it was thought of for server virtualisation in on-premise data centres. Currently, on-premise servers are in decline as enterprises move to the cloud. Morningstar thinks VMware has shifted nicely and is not being given enough credit for its transition. “We think they are uniquely positioned as the glue between on-premises, public clouds, and private clouds for workloads,” says Brian Colello, director of technology equity research.
“Essentially all cloud providers are offering VMW’s solutions to enable holistic infrastructure management, and this hybrid-cloud infrastructure is playing out to be the norm.”
Semiconductors – given the enormous demand they’re receiving from electric vehicles, everyone wants to own semiconductor businesses, but finding them at a reasonable price can be difficult. Skyworks Solutions, is among the best valued of the semiconductor businesses, Morningstar believes. It has “terrific” exposure to 5G smartphones, increasing content in Apple's iPhone 12's, and strong fundamentals. Their most recent quarter exceeded expectations.
1. Bloomberg 2021