The tech sector seems ripe with opportunities for investors. Since the recession of 2008–2009, tech stocks have outperformed the broader stock market, notes Brad Sorensen, managing director of market and sector analysis at the Schwab Center for Financial Research. Looking ahead, Brad believes the tech sector has the potential to continue to outperform over the next three to five years. Let’s take a look at the factors that are bolstering tech stocks—and where attractive options may be for investors now.
First, if you’re looking to expand your portfolio of IT stocks, it’s important to look beyond the marquee names and consider companies that may have lower profiles but serve critical, high-growth needs, such as B2B software-as-a-service providers and telecom equipment manufacturers, Brad notes. Many companies in the technology ecosystem fly under the radar of the news media, but because they provide essential components for enterprise technology systems, these tech stocks can offer growth opportunities for investors.
Tech stocks offer some key advantages for investors: stronger balance sheets now, as compared with the days of the dot-com bubble, and increased demand from businesses and consumers. “Many technology companies today have low debt and high cash reserves,” says Brad. Also, he notes, during and following the recession many companies underinvested in technology—and are now making significant upgrades to improve productivity and protect their data. When expanding or rebalancing your holdings, focus on companies with strong business models and cash flows.
“Business consumers are shifting from hardware and more toward software and services that can create greater efficiencies,” says Peter Wahlstrom, director of equity research, global technology, media and telecom at Morningstar. In particular, providers of social, mobile, analytics and cloud (SMAC) software and services are increasingly in demand. The number of networked and mobile devices alone has more than doubled to 15 billion over the past five years, according to Gartner research. Software as a service—subscription-based software for which users pay a monthly fee, rather than a onetime installation charge—is also growing.
It wasn’t so long ago that businesses could get by using mere spreadsheets to analyze their data. But as digital advances have increased customer contact, the amount of data that companies collect and store has risen dramatically. Today, companies interact with customers through phone calls, online chats, social media posts and more—and are using sophisticated software to help them analyze the resulting trove of information, says Brad.
- To read more about the information technology sector, visit Schwab Sector Views.
- Use the Schwab Stock Screener or Mutual Fund Screener to help evaluate opportunities in the tech sector.
- Find a Schwab Financial Consultant near you for personalized sector guidance.