After the so-called "tech wreck" of 2022, some investors may be wondering if the information technology sector's best days are now behind it.
But look beyond the challenging headlines that some companies have faced of late, and one can find powerful long-term themes creating potential value for investors—like the shift to hybrid work and continued adoption of cloud computing. And after recent price drops, some opportunities may even be found to invest in these themes at attractive valuations.
A challenging past year
Before digging into the sector's recent history, it may be useful to explain what's included in the information technology sector and what isn't. The sector is predominantly composed of companies that make and sell technology software and services. It does not, however, include companies that are popularly thought of as tech companies but that primarily earn revenue from digital advertising, like Alphabet and Meta (which are instead part of the communication services sector).
Those notable exclusions may help to explain why the sector's performance in the past year—though still lagging the S&P 500®—wasn't worse at the aggregate level.
The sector did, however, suffer from the same challenges as the broad market, including investor anxiety related to high inflation and rising interest rates. And with consumers and businesses increasingly worrying about growing recession risk, some buyers reduced spending on technology.
Opportunities in cloud computing, 5G, and semiconductors
But the macroeconomic and geopolitical anxieties of the past few years may have merely distracted investors from powerful long-term trends that could continue to create opportunities for information technology companies.
For example, virtually every company in every industry is now looking to use technology to get closer to its customers, innovate more quickly, and operate more efficiently. Many firms are embarking on multiyear digital transformation projects, and this may only accelerate as companies adapt to hybrid work environments. Companies that provide the technology to aid in these transitions could be potential beneficiaries of this trend. Firms such as Salesforce (
In particular, increasing adoption of cloud computing continues to be a disruptive influence, as enterprises shed their in-house hardware-based architecture in favor of cloud-based systems. Roughly 60% of corporate workloads have already moved to the cloud, and that figure is projected to rise to roughly 70% by 2025.1 One of the key advantages of cloud computing is the ability to tap into artificial intelligence and machine learning (AI/ML). Our modern digital economy throws off vast quantities of data every day, and AI/ML can help businesses to organize and make sense of that data—a need that could only grow in the years ahead. Recent holdings that illustrate this investment thesis include Nvidia (
In telecommunications, the move to 5G wireless networks is well underway. As more bandwidth becomes available, industries—including health care, media, manufacturing, housing, energy, agriculture, and transportation—may find ways to make use of it. That increased bandwidth could help support the move in many industries toward more autonomous systems (such as, eventually, self-driving rideshares). The large cloud platforms in the US—specifically Microsoft Azure, Amazon Web Services (AWS), and Google Cloud—are also working on designing architectures so that they can essentially serve as an extension of mobile networks, effectively merging these networks with their clouds. Stocks that can play a part in advancement of these themes include Marvell Technology, Apple (
Semiconductors are key to bringing all of these technologies to life, and demand for semiconductors could remain high in 2023. The pandemic disrupted supplies of chips for many industries, particularly in automotive production. In response to those disruptions, new chip factories are being built and planned in multiple regions to create more certainty of domestic supplies in the years ahead. Recent holdings that illustrate this investment theme include GlobalFoundries (
Fund top holdings*
Top-10 holdings of the Fidelity® Select Technology Portfolio (
- 24.7% – Apple Inc. (
) - 16.8% – Microsoft Corp. (
) - 5.7% – Nvidia Corp. (
) - 5.6% – Mastercard Inc. Class A (
) - 4.1% – Marvell Technology Inc. (
) - 3.2% – NXP Semiconductors NV (
) - 3.1% – Salesforce Inc. (
) - 2.8% – ON Semiconductor Corp. (
) - 2.4% – Cisco Systems Inc. (
) - 2.3% – GlobalFoundries Inc. (
)
(See the most recent fund information.)
Looking ahead with cautious optimism
After a vexing year, 2023 may be a more interesting and hopeful one for the technology sector. While a recession, should one occur, could slow the pace of the long-term changes that are pushing the sector forward, best-in-class companies benefiting from these themes could nonetheless present long-term opportunities as well as attractive valuations.