6 Reasons To Invest In The Tech Sector
There is a lot of uncertainty going on in the world markets now, making new investments a rather risky endeavour. Whether it’s the current trade war between the US and China or the increasingly likely ‘no-deal’ Brexit, you can be assured that savvy investors are looking for safer industries to park their money.
Out of all this, technology is an attractive option for short- to medium-term gains. The speed at which the consumer tech sector develops allows for rapid growth. Startups get bought over by bigger companies for their patents and expertise, while bigger companies are practically driving the global economy at this point.
Interested? These are some technology markets that should be in your investment radar this year:
It’s difficult to go wrong when it comes to investing in telcos and Internet service providers (ISPs). After all, everyone needs access to the internet, and most telcos are capable of turning an annual profit. That should seem like an obvious investment.
However, a less obvious industry is the market for telecommunications infrastructure. This covers suppliers of antennas, nodes, towers, and the installation of this equipment.
Why is this a big deal now? Because the International Telecommunication Union will begin deploying 5G wireless connections in 2019, with a full rollout completed by 2020. This replacement for the current 4G LTE connections requires a massive infrastructure redesign.
Without going into too much detail, 5G connections work on a different wavelength than LTE. It allows for 10x the current mobile data connection speeds, which will require more cell towers to be deployed to cover the same amount of space. This will result in increasing demand for telecommunications infrastructure where 5G is on schedule to be deployed.
Cloud computing and the Internet-of-Things (IoT) are closely related. According to Intel, there were as many as 15 billion devices connected to the internet in 2015, with this number expected to reach 200 billion in 2020. All these devices will have to be connected and controlled by their own servers; leading to an explosion in demand for cloud computing capabilities.
In return, companies are throwing more and more money into the cloud in order to cater to this explosion of server requirements. Microsoft’s Azure cloud business doubled its profits last year, while Amazon Web Services grew 49% year-on-year in Q1 2018.
Smaller companies like Salesforce.com, F5 Networks, and Juniper Networks have all posted similar amounts of growth, showing that the potential for cloud computing isn’t only confined to the biggest companies in the world. This creates many openings for potential investors to make gains in this market.
Technology enthusiasts have been bemoaning the price of components over the last year or so. This is due to a shortage of memory chips, a component that is necessary for building just about any gadget that’s currently on the market. Covering smartphones, laptops, tablets, smartwatches, and onboard computers for cars.
What has been happening is that smartphone manufacturers like Apple and Samsung have been buying up all production capacity in the world, leaving other electronics makers scrambling to claim what’s left of the semiconductor producing industry.
It doesn’t help that the world’s memory production is controlled by only a handful companies. NAND flash memory – which is used for file storage in your phones – is a US$58 billion industry dominated by six companies (Samsung, Toshiba, Sandisk, Micron, SK Hynix and Intel). Similarly, the DRAM industry was worth $71 billion in 2017; with only four major companies.
Several new companies are trying to break into both NAND Flash and DRAM industries but have had limited growth so far. However, demand for both types of memory is only going to increase over time. Especially if you consider that Apple sets new sales records for its iPhone every year, and is a prime driver for demand of memory chips.
The creation of consumer goods is rapidly evolving with the introduction of new technologies. Computer Aided Design (CAD) and Augmented Reality (AR) have both cut down the amount of time and effort needed to develop new products. This allows companies to not only quickly prototype their ideas, but also push them out to market much quicker.
Proton, for instance, has used rapid prototyping to reduce time spent in the design phase by 20%. That’s not even accounting for newer technologies like AR headsets that could further cut down development time by completely cutting out the need for iterative prototyping.
Of course, it helps that Microsoft has partnered with most major computer manufacturers to produce mass market versions of these AR headsets. Acer, Dell, HP, Lenovo, and Samsung have all agreed to cater to manufacturers with these designs; with Acer and Lenovo already putting their versions on the market.
This move shouldn’t only be seen as investing in the technology companies themselves, but also manufacturers that are adopting these high-tech production methods.
Everyone has heard of e-commerce at this point, and the market in this space is only set to grow. Alibaba saw a 96% growth in June 2017. Admittedly, this could also be linked to the growth of its cloud computing business as outlined earlier. But, a US$1 billion investment in Lazada shows massive faith in the e-commerce space.
Similarly, Amazon’s profits topped US$2 billion in a quarter for the first time in July 2018, indicating that there is no stopping the online shopping giant. Although, again, this number is likely helped by the widely successful Amazon Web Services.
The impact of online retailers on the economy cannot be understated. They do not only generate a large amount of revenue, but also create many job opportunities. Companies that directly support this industry – like delivery services – are also seeing an increase in business. All thanks to the sheer number of packages that need to be shipped each day.
Technology as a whole has shown a large potential for growth. Provided that you are careful with the investments. Social media investments have shown to be of limited value. Twitter lost 20% of its value in July 2018 after the platform banned over 1 million accounts for being bots. Facebook, on the other hand, is facing severe downward pressure due to the recent resignation of Instagram founder Jack Dorsey and numerous data breach scandals.
Artificial Intelligence (AI)
The current buzzword going around technology circles, artificial intelligence is being deployed by many companies to better understand their customers. It’s technically more accurately known as machine learning (AI is more of a marketing term), which is a system that uses something known as a neural network to process data.
The benefit of using machine learning is that it is capable of sifting through large amounts of data within a small amount of time. These neural networks can also be trained to perform to do just about anything; such as translating languages, driving cars, detecting market trends, and even playing games.
Smartphone companies have been using machine learning and edge computing to enhance the users experience. AI assistants such as the Google Assistant, Apple’s Siri, Samsung’s Bixby, and Microsoft’s Cortana are all examples of how machine learning is being deployed to change how users interface with their devices.
But consumer tech is not the only place where machine learning is being deployed. Medical trials using computer aided diagnosis and patient care are currently ongoing. With surgeons reporting that AI aided surgery reduces hospitalisation time by 21%, and virtual nurses being deployed to answer queries from visitors.
Last year, a Google funded AI project known as Deep Mind demonstrated just how far machine learning has come in terms of cognitive ability. Beating the world champion at the traditional Chinese game of Go in a five game series; inventing a completely new strategy that had never been seen before. A feat that was previously thought to be impossible due to the complexity of the ancient boardgame.
Separating potentially good technology investments from those with low yields is a tricky concept. Even the massive market share of China’s Xiaomi somehow turned into a lackluster initial public offering (and is now trading below the value of the initial offering). Your best bet is to just leave it to the experts to actively manage your money.
CIMB-Principal Global Technology Fund and CIMB-Principal Millennial Equity Fund are examples of investment funds that target technology-based equities. The CIMB-Principal Global Technology Fund actively targets technology-related companies. Making the most of the current explosion of connected devices around the world. On the other hand, the CIMB-Principal Millennial Equity Fund targets equity in companies that are impacted by millennial activities. Which, as everyone knows, is almost completely connected to the internet and its various supporting devices.
If anything, it’s technologies that support and improve existing businesses that are doing well. Investing in tech that provides a competitive edge, like e-commerce or cloud services seems to be the way to go, judging by the performance of the technology sector both in the stock market and the companies themselves.