Mobiles and clouds to lead tech turnaround - Fidelity Investments

Source: Fidelity Investments

A decade after the technology bubble burst, the convergence of a number of trends is expected to drive growth throughout 2010 and beyond for the previously unloved sector, according to Fidelity International.

Dmitry Solomakhin, portfolio manager at Fidelity International, believes the technology sector is at the start of a number of product cycles from which investors can benefit. The key opportunities are:

* Mobile data - the continuing development of smart phones and mobile internet devices and the resulting expansion and upgrades of networks;
* Recovery in IT corporate spend - the need for corporations to refresh their IT systems and, longer term, the move to 'Cloud' technology.

He says: "We have a number of very exciting product cycles ahead of us that have either just started or are likely to start in the next year or so. That means some companies will see very good top line growth combined with very good earnings growth.

"A lot of technology company executives have been through the boom and bust and are being are being quite disciplined in the current downturn, which is quite different from 10 years ago. Balance sheets across the sector are generally in very good shape and valuations are still quite attractive relative to the long term history of the sector and relative to the market. All of these factors combined make me optimistic over the next year or so."

Mobile data

The launch of the iPhone revolutionised the way people use their mobile phones, with the demand for mobile data growing. Solomakhin believes the winners from this trend will be the companies that supply components for smart phones and those involved in the expansion of networks to cope with growing demand for the technology. A company he favours is NAND flash memory maker SanDisk which he believes is well positioned to benefit from the trend.

He says: "We are seeing increased penetration of smart phone devices. If someone wants to buy a new mobile phone now, chances are they will buy a new smart phone. We are only in the second year of what I think will be a very powerful multi-year trend.

"We are also seeing a strong trend towards video on the internet. If you loou u look at the internet right now, video is only a very small proportion of total internet traffic but it is growing very rapidly. That means we are going to see investment into these technologies; there will be investment into networks, because the networks need to be capable of supporting this traffic growth, and we are going to see investment into consumer devices such as smart phones."

Corporate spend

Solomakhin is also expecting increased IT spend by corporations into 2010 and beyond, although this is dependant on economic conditions continuing to improve. He says: "What we are seeing right now is that corporates are increasingly interested in so called 'Cloud' technology whereby a firm's computing resources are moved to centralised data centres.

"The technology has improved dramatically and in the past 12 months we have seen some of the more sophisticated customers such as financial institutions getting heavily involved in pilot projects. The introduction of this technology will take time; it will be gradual but very powerful and this will be beneficial for companies such as virtualisation software developer Citrix Systems.

"In the meantime, for the next 12-24 months, most corporates will have to refresh their PCs because the current average age of a corporate desktop is approaching four years which is beyond typical standard warranty timeframe.

"Also, most corporates are still running Windows XP which is now eight years old. There is a huge incentive to migrate to Windows 7 which was recently released and has so far had very positive feedback. This should provide corporates with further incentives to refresh their PC installed base. Considering these two things together, I think the second half of 2010 looks good."

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