✔ International tech ideas may be less closely covered by research analysts and offer growth potential.
✔ Cloud computing is still in its early stages and could create opportunities for software companies.
✔ Machine learning leaders are increasingly building their own solutions, which could challenge legacy hardware companies.
Technology stocks had been leading the market higher in 2017, with the tech-heavy Nasdaq Index notching an all-time high in early June. The FAANG stocks—Facebook, Apple, Amazon, Netflix, and Google—have been major contributors, but those stocks have recently shown some weakness. For investors, it may be worth remembering that those aren’t the only stories in tech.
Viewpoints recently caught up with three Fidelity fund managers to find out where they are searching for tech opportunities. Among their ideas: international tech, Internet services, machine learning, and software as a service. While these areas are developing fast and creating attractive investment potential, this trend could spell bad news for legacy hardware providers.
Why I am looking at international tech investments
Fidelity® Select Technology Portfolio (FSPTX)
I continue to look for new ideas in international markets, where many companies are undiscovered or under-followed by research analysts. I believe these markets are a source of compelling growth opportunities.
For example, in the consumer segment, Internet services and e-commerce companies remain attractive growers, especially those that sit at the intersection of the social, mobile, and local investing themes. In Asian markets—especially China, South Korea, and Japan—these industries have generally seen a pace of innovation as fast as, if not faster than, their Western peers. This pace has been driven by a more lenient regulatory environment and by incumbent companies in certain industries that are much less developed than their Western counterparts.
Internet finance is another area of rapid growth. Consumer credit offerings have very low penetration in international markets, particularly in China. And in Southeast Asia, smartphone adoption has started to resemble growth trends seen in China three years ago. I believe considerable long-term value will be created in this broad region.
After a period of significant capital inflows, we’ve seen a recent decline in corporate funding activity, which I believe is very positive for existing Internet companies, because it means higher barriers to entry and less competition.
Cloud computing: still in its early stages
Fidelity® Select Software and IT Services Portfolio (FSCSX)
Speaking as a software analyst, I’d say that cloud computing is the most important trend I follow. Filtering out the buzzwords, the cloud essentially consists of applications and infrastructure hosted and delivered over the Internet rather than on a customer’s physical premises.
Most software firms are in the early stages of migrating from on-premises deployment of their infrastructure and applications to a cloud-based system. The transition is similar to companies forgoing their own on-site generators to consume electricity via a remote utility.
This type of consolidated architecture enables economies of scale and is truly what has helped Google, Amazon, and other companies build and operate huge computing-intensive cloud services.
Just a few years ago, only peripheral applications such as those for marketing and recruiting were cloud-based. Today, however, the shift has gone mainstream, and we are now seeing companies run their entire business in the cloud—including mission-critical applications such as those for finance and payroll.
Today, an increasing number of Fortune 500 companies are in the process of migrating more of their workloads to the cloud through providers like Amazon Web Services, the current leader in public cloud infrastructure.
From an investment standpoint, I am looking to emphasize companies that can capitalize on this transition. Two recent examples of fund holdings in the cloud space are SaaS (software as a service) firms Salesforce (CRM) and Workday (WDAY), which have gained more and more Fortune 500 companies as customers.
The disrupting influence of “democratized” machine learning
Fidelity® Select Computers Portfolio (FDCPX)
I recently attended a conference about machine learning and cloud computing, and I came away believing even more strongly that these technologies have the potential to transform and disrupt markets in ways we have only hints of presently.
I think what’s happening now will eventually bring about the “democratization” of machine learning. That is, ordinary people will be able to use it, not just machine-learning experts.
So, for example, if someone needs help with language translation or image recognition—two tasks for which machine learning typically is used—that person should be able to just plug into a user-friendly interface provided by one of the major cloud operators. You shouldn’t need special knowledge to benefit from it, in the same way that no special knowledge is needed to reap the benefits of electricity—you just flip a switch and it works.
Although this could be great for consumers of these services, it’s probably more bad news for legacy hardware providers. It’s always hard to predict how rapidly new technologies will make older ones obsolete, but from all indications, I think this trend is moving faster than most people currently anticipate. This could create ongoing challenges for legacy hardware firms.
More and more, cloud-services and machine-learning providers like Alphabet (GOOG) and Amazon (AMZN) are designing their own hardware instead of buying it pre-built and “off the shelf” from hardware companies.
If you are considering increasing your focus on tech investing, a good place to start might be researching broad-based tech mutual funds or ETFs.