A nearly insatiable appetite for the latest personal electronic devices should enable the information technology sector to maintain positive momentum for the next year.
Apple’s blowout second quarter, which topped Wall Street expectations for both revenue and profit, is the latest affirmation of the power of the consumer in driving tech results.
The world’s most valuable tech company saw iPad sales more than double, while iPhone sales rose close to 90 percent. And the best could be yet to come as tech researcher Gartner projects tablet sales to increase 98 percent in 2012, with Apple expected to capture more than 60 percent of the market.
Apple’s success is lifting its entire supply chain, which includes well-known chipmakers Qualcomm, Broadcom and ARM Holdings. Smartphone rival Samsung is having a similar salutary effect on its suppliers.
ETFs targeting the semiconductor sector such as SPDR S&P Semiconductor are good ways to leverage the growing ubiquity of mobile Internet devices.
Deutsche Bank analyst Ross Seymore recommends overweighting semiconductors, as they appear to have reached a cyclical bottom in the first quarter and should see improved results the rest of the year. One of the strongest end markets will be handsets, which includes suppliers to Apple and the other smartphone giant, Samsung.
ARM, a leading supplier of energy efficient chips that increase battery life for smartphones, has a two- to three- year lead over Intel in the space, according to Rob Lutts of Cabot Money Management in Salem, Mass., and is an example of the innovative companies he favors.
“The real opportunity is in new tech,’’ says Lutts, who includes in this group companies that can increase productivity on the Internet, help users easily store and protect their data, and improve existing industrial and medical processes.
Stocks in this realm include China’s NQ Mobile , Intuitive Surgical, Salesforce.com and Ansys .
With most consumer and business activities now occurring in a digital environment, data storage and data analysis providers are enjoying a strong tailwind, notes John Toohey, vice president of equity investments at fund manager USAA. The theme of “big data” benefits stocks ranging from Googleto storage giantEMCand flash drive makerSanDisk.
Brian Rich of New York private equity firm Catalyst Investors is another advocate of disruptive technologies, most of which are being developed by startups and smaller companies.
He’s positive on stocks in the software-as-a-service — or software on demand — Internet infrastructure, digital media, and ad tech areas. Stocks in these areas include CommVault and Rackspace Hosting and can be tapped through ETFs like PowerShares S&P SmallCap Information Technology, which tracks tech stocks in the S&P Small Cap 600 Index and First Trust ISE Cloud Computing.
Kim Caughey Forrest, a senior analyst for the Fort Pitt Capital Total Return Fund, is a believer in cloud computing but prefers to play it through large-cap companies trading at more attractive prices than newer, niche-oriented stocks favored by momentum investors.
Enterprise software providersCA, BMC Software and IBM get most of their revenue from business clients, which are a steadier, less price-sensitive source of demand than consumers.
“Established names are the guts of the cloud,’’ she says. “They have the cash flow to chew away [at niche providers].”
Forrest also likes Dell and Intel, two stocks that have been hurt by poor perception rather than fundamental business issues. PowerShares QQQ , the original tech ETF that tracks the tech-heavy Nasdaq 100, blends a mix of household tech names with upstarts like Baidu.
Individual stocks aside, technology as a whole is well-positioned for current economic conditions. Consumers now stay home more often and prefer purchasing technology products over other big ticket goods and services, says Toohey. The sector is also just starting to gain traction among aspirational consumers in fast-growing emerging markets.
And finally, there’s the corporate customer.
“Businesses have squeezed all they can out of employees and need technology to maximize labor productivity,’’ says Toohey.
