For starters, customers are back.
Drastic cost containment in the tech space during the credit bubble created a pent-up demand that has led to a strong burst in technology spending.
We are seeing tech spend returning to more normal levels as companies slowly loosen their purse strings.
Additionally, many companies are looking to upgrade their IT infrastructure in order to increase efficiency and productivity at all levels.
In a tight economy where profits rely less on top line growth, technology is seen by many as a way to increase margins.
The beneficiary of this current challenging environment are technology companies.
Many companies in the technology sector have balance sheets that are solid, with large cash balances and relatively low debt. According to a recent Nomura report, the top US technology companies have cash and marketable securities of around US$200bn sitting on their balance sheets. This reserve gives them significant stability relative to other sectors. And with cash available many companies are now considering acquisitions.
IBM just recently said they plan to go on a shopping spree with $20 billion to spend over the next five years. Microsoft , Cisco and Oracle , are also on the acquisition trail, after having hoarded cash through the downturn. A consolidation within the industry will reduce competition in many areas, leading to companies with stronger barriers to entry and increased margins.
The weaker dollar is benefitting the sector as a larger portion of earnings come from abroad, primarily Asia. New products such as iPhone, Kindle, iPad, LED TVs are also keeping consumers spending. Retail sales in electronic and appliance stores have been rising while producer prices for semiconductors have moved higher, which could help support profitability. From the mobile computing revolution to cloud computing and the virtualization of data centers, the tech sector is expanding it's impact on the economy.
In a recent CNBC interview, Cisco's John Chambers was bullish saying the company is coming out of the downturn stronger, gaining market share and a “larger share of the total wallet spend of our customers.” The company recently reported solid third quarter earnings with a “return to strong balanced growth” across the board that has not been seen since before the economic downturn. And Cisco is not alone; other companies are reporting strong results as well.
There are risks in this sector to be sure.
Valuations can be stretched in times of excess euphoria and investors need to careful. Buying overpriced assets tends not to work out well in any sector. There still is the risk of a downturn in the economy which could freeze spending again. And consumers are still tentative which is a headwind for tech sales. Like any investment there are issues that need to be examined with a healthy dose of skepticism.
But in an environment where industries with tailwinds are hard to come by, tech stands out. As investors, look to the future and determine the technology trends that look likely to play out. Find the companies best positioned to capture market share and assess their business strategies. Do your homework and watch valuations carefully.
Prudent forward looking investors will find opportunities in this sector.
PROGRAMMING NOTE: Mr. Yoshikami will be a guest on CNBC's Closing Bell with Maria Bartiromotoday at 4pm/et.