What we call the technology sector is really an aggregate of many smaller subsectors. For investors, it's key to look at these subsectors, which may offer unique long-term investment opportunities.
When was the last time you had an investment conversation in which no one mentioned one of the so-called FAANGs? Or FAAAMs? That's the stocks quintet of Facebook, Apple, Amazon, Netflix and Alphabet's Google that has come to represent the entire tech sector — and the answer is, probably, a very long time.
The growth prospects of technology are easy to imagine. What's more challenging is how to invest thoughtfully across the sector. Innovation is happening at breakneck speed, yet the run-up in top tech names has led investors to wonder about two things: First, is it too expensive? And second, where's my entry point?
Valuations are elevated, and for good reason: While it's true that tech tends to trade at a premium, we are far from a dot-com bubble repeat, in our view. Many of today's tech companies feature robust earnings growth, strong balance sheets and growing dividends.
What's more, tech is currently one of the few sectors with a strong secular growth profile. Innovation doesn't ebb and flow with market technicals — it is a structural, disruptive force, permanently separating winners from losers. In that light, it is rational for markets to place a premium on the sector. Valuations may be beside the point, particularly if tech earnings can continue to grow into their valuations.