- Tech stocks have been in and out of favor so far in 2021, but long-term investors may want to instead focus on technologies that can power long-term earnings growth.
- Sales of software and hardware to develop and maintain artificial intelligence (AI) are increasing globally and AI will power many future innovations.
- Fifth-generation (5G) wireless technology may benefit investors in companies that provide the technology behind it as well as those that use it.
- Increasing ransomware attacks have investors' eyes on network security companies who keep digital information safe.
Technology stocks have been on a rollercoaster ride this year. But long-term investors may want to ignore the crowds jumping off and onto the tech stock bandwagon and instead look for stocks with potential for solid earnings growth and higher stock prices into the future. One way to do that is to understand which technologies are likely to have long-term impacts on the world.
We recently spoke with Fidelity fund managers to learn more about where they see opportunities in long-term tech trends. Here are 3 worth paying attention to now.
Artificial intelligence (AI)
Artificial intelligence is a technology that's both "what's next" and "what's now." AI is already teaching computers to sense, reason, adapt, and act like humans, combining huge databases and serious computing power to enable machines to make predictions and rational decisions. And AI is still in the early stages of development and adoption.
"AI will be a major focus for chief executives and chief technology officers in the coming decade," says Adam Benjamin, Fidelity equity research analyst and portfolio manager. "I'm seeing potential that AI may grow to one of the most significant long-term technology trends."
In the future, Benjamin contends, AI could help companies develop personalized drugs, instantly translate languages, launch better and longer-lasting consumer products, grow more and better food, and help governments avoid natural and economic disasters.
Companies with better technology powering AI behind the scenes are likely to emerge in the coming years, Benjamin claims, although he thinks 3 firms have a significant head start and could be important AI providers in the future.
One is semiconductor company Nvidia (NVDA), which is designing high-performance chips that accelerate data throughput in AI applications. The company also offers related software that helps companies more easily deploy deep-learning technology. Nvidia also sells servers that help make trade-offs between performance and efficiency to reduce the energy requirements of AI applications.
Benjamin says Salesforce (CRM) is helping to power AI with its Einstein offering, in partnership with Amazon (AMZN). The 2 companies are working to embed Amazon Web Services (AWS) for AI, voice, video, machine learning in Salesforce applications that power customers' sales and service operations, as well as specialized Salesforce software for different industries.
The fund he manages also invests in Twilio (TWLO), a company that's using AI in its Autopilot conversational interface that understands natural language and the human decisions made by customers. By analyzing call transcripts and chat logs, it helps to "train" chatbots over time so they provide better customer service and clean hand-offs to real-life service agents.
"As more and more data is being created by the second, there's a fast-growing need to analyze it through artificial intelligence, and these are 3 companies I think are leading the way," Benjamin asserts.
Fifth-generation wireless (5G)
The next generation of wireless technology offers speeds up to 100 times faster than current 4G wireless. Countries around the world are scrambling to upgrade their wireless capabilities to take advantage of the benefits of that speed. Currently, China is home to the majority of the world's 5G base stations and has plans to add hundreds of thousands more. The higher speeds of 5G have the potential to transform a variety of industries including health care, media, manufacturing, energy, and even agriculture.
Benjamin says, "Many of the 5G advances are still in their early stages, which is why I think we'll still be talking about 5G as an investment theme for years to come."
"The US is still in the early phase of its transition to 5G. It may take until the end of 2022, or even into 2023, for network density and coverage to improve to the point where most wireless customers in the US experience meaningfully faster network speeds due to 5G," he says.
Benjamin sees Apple®'s (AAPL) launch of its 5G iPhone in 2020 as part of a rising wave of consumer products which incorporate 5G technology. Already, 5G handsets make up more than a third of global smartphone shipments and Apple remains the biggest seller of 5G smartphones. But even though Apple is shipping millions of phones every week, Benjamin says the market for 5G phones has plenty of room to grow.
While the transformations wrought by 5G may create longer-term opportunities for investors in a wide variety of companies Benjamin sees 5G creating immediate opportunities in companies such as Marvell Technology (MRVL), whose semiconductors are used to power many 5G base stations. Marvell has delivered 6 consecutive quarters of revenue growth thanks to 5G infrastructure and it has built needed data-security features into its products, he says.
Benjamin also sees a 5G opportunity in Nvidia, whose platforms help customers deliver artificial intelligence applications across 5G networks. Nvidia says this could eventually help speed the creation of digital cities, factories, and hospitals.
As the number of ransomware events continues to surge, worldwide attention is focused on the safety of companies' digital spaces. Hackers who instigate ransomware attacks freeze network computer systems, then extort money from enterprises to bring them back online. Industry research group Cybersecurity Ventures predicts ransomware will cost victims about $265 billion annually by 2031, with a new attack every 2 seconds. But network security companies are at the forefront of preventing the next attack. These companies are also at the forefront of investors' minds.
"This is a huge international problem that I don't think is going away soon," says Ali Khan, portfolio manager of Fidelity® Select Software and IT Services Portfolio (FSCSX). "It's going to require the help of our federal government, state officials, and the expertise of network security companies to limit the damage from these types of attacks."
Khan says industry leaders are working hard to make both corporate and government networks safer. He points to Palo Alto Networks (PANW) as a fast-growing network security company that provides next-generation firewall appliances to keep intruders out, as well as a threat detection system powered by artificial intelligence. Khan considers the company a holistic security provider and a leader in cloud-based security.
Proofpoint (PFPT) is another company that helps affected companies stop ransomware attacks and other threats, as well as understand the individual risk people within an organization pose from a security standpoint, says Khan. He adds that in May Forrester Research recognized the company as a leader in enterprise email security.
FireEye (FEYE) offers on-premise and cloud-based security software that protects both networks and email systems and Khan calls its Mandiant Incident Response software a premier brand and a go-to solution when systems are breached. He believes the company is working to boost recurring revenue, displace legacy vendors, and better compete against rivals.
Khan also likes Tenable Holdings (TENB), which provides both on-premise and cloud-based vulnerability management software and has a strong market position among US government customers. He adds that it is recognized for accurately covering security vulnerabilities.
"More spending with any of these software providers doesn't guarantee network safety, but a lot of customers remain very vulnerable to ransomware," Khan says. "And these are companies that I think are helping to provide answers for how to deal with it."
Those who want to invest in these technology trends may want to consider professionally managed mutual funds and ETFs. Fidelity® Select Software and IT Services Portfolio (FSCSX) held securities mentioned in this article as of their most recent holdings disclosure. For specific fund information, including holdings, click the fund trading symbol above.