Investment Institute

Technology stocks: Long-term trends present compelling opportunities

  • 08 March 2023 (7 min read)

Key points

  • A rotation from Growth to Value has left technology stocks in a potentially compelling position – with attractive valuations and robust long-term drivers
  • Cloud computing, digital transformation, the rise of 5G, semiconductors and cybersecurity are underpinning potential growth
  • In our view, the technology sector remains awash with opportunity

Following a stellar period for technology stocks during the COVID-19 crisis, 2022 saw them brought back to earth as a series of headwinds conspired against them.

During the pandemic, technology helped us shift to a ‘new normal’, as greater interconnectivity became even more essential; in the wake of this environment the tech-heavy Nasdaq-100 index delivered a significant 47.6% in 20201 – with hefty gains achieved again during 2021.   

However, its aftermath saw Russia invade Ukraine, inflation hit multi-decade highs, and monetary policy rapidly tighten. As a result, equity investors in their droves swiftly switched from Growth to Value stocks. Consequently, the Nasdaq-100 finished 2022, 33% lower.2

But we believe this re-rating has left tech stocks in a far more compelling position, not least because the robust long-term growth drivers behind them are still very much in place, while valuations are now at more attractive levels.  

Signs of recovery already underway

While we can expect further volatility over the short term, 2023 has brought with it a renewed positivity among investors. Inflation is moderating and it is widely expected the US Federal Reserve will ease back on the pace of its interest rate hikes - both of which should improve the outlook for corporate profit margins. Many of last year’s laggards, including technology stocks, have already enjoyed a strong rebound, and tellingly the Nasdaq posted its best January performance since 2001, delivering a 10.6% return.3

In any case, when it comes to tech shares, valuations are only part of the story. Of course, valuation is important – it can help us find an attractive entry point - but the key for long-term investors is identifying fundamentally good quality growth and we believe that plenty of long-term opportunities remain across the technology universe.

Key drivers of future growth

When technology is ready to be commercially deployed, it can often address a far larger market than initially anticipated. Technology firms no longer just sell hardware and software but provide services which in turn provide regular income streams.

Tech has evolved, and continues to do so, in ways few would have imagined 20 years ago – Amazon, initially an online book seller, purchased Hollywood giant and owner of the James Bond franchise MGM for $8.45bn.4 Alphabet (Google) has been public since 2004, but in many ways is still growing like a start-up.

We believe there are several key drivers underpinning potential future growth in the technology sector; we highlight several below.

Cloud computer and infrastructure spending

Cloud computing is the delivery of computing as a service rather than a product. According to the International Data Corporation (IDC), spending on computer and storage infrastructure products for cloud deployments, including dedicated (private cloud) and shared IT environments (public cloud), increased 24.7% year on year in the third quarter of 2022 to $23.9bn.5

For the full year 2022, IDC is forecasting cloud infrastructure spending to grow 19.6% year over year to $88.1bn. The market continues to benefit from high demand and large backlogs, coupled with an improving infrastructure supply chain. Longer term, IDC predicts spending on cloud infrastructure to have a compound annual growth rate of 12.9% over the 2021-2026 forecast period, reaching $135.1bn in 2026.6

Cloud computing is enabling new business models to scale. For example, technology firms are no longer just selling hardware and software, but also use cloud computing to provide subscription services (e.g. Amazon Music, Microsoft Xbox Live, Apple TV and Google Play) that provide regular income streams. According to Gartner, worldwide, public cloud services are forecast to grow 20.7% in 2023 to almost $600bn.7

Digital transformation

Digital transformation is the process by which companies embed technology across their businesses to drive benefits such as improved efficiency, increased business dynamics and, ultimately, adopting a digital first mindset as they compete for customers and employees against digital native businesses - that is, companies that were built to primarily operate online.

This journey might take a different form for each business as it touches upon customer experiences, worker empowerment, operational efficiencies to name a few; however, there are aspects of common ground despite the precise path that might be travelled. The digitalisation of data, software-as-a-service (SaaS), analytics and artificial intelligence, and cybersecurity all play a vital role in this opportunity.

The results can be seen across a variety of industries such as retail banking where the provision of a mobile banking app is no longer a ‘nice to have’ but a ‘must have’ if you want to be able to attract the next generation of customers to choose you for their banking needs. Governments around the world are also seeing the benefits of introducing more digital based self-service processes for a variety of tasks. 

The rise of 5G

Over the last decade the adoption of the smartphone and new applications such as social media, video communications, gaming, digital payments and so on has been supported by the deployment of 4G networks. While 4G was a notable improvement on 3G, 5G has been engineered to be optimised for a data-centric network, rather than a voice-centric network with a data overlay. Telecom operators will be able to drive a more efficient use of their spectrum via the transition to 5G and enable new revenue opportunities.

We believe that 5G will be the key technology to a more connected world that will ultimately have ramifications for a wide variety of end markets such as transport, manufacturing, entertainment and healthcare. 

According to PwC, the key functional drivers of 5G will unlock a broad range of opportunities, including the optimization of service delivery, decision-making, and end-user experience. This will result in $13.2trn in global economic value by 2035, generating 22.3 million jobs in the 5G global value chain alone. At the current time we believe the most interesting investment opportunities lie within the providers of communications infrastructure and semiconductors.8


A key aspect of the technology development in our everyday life has been the expected pervasiveness of electronics and semiconductors everywhere. While most of the world’s silicon chips were once used in computing-related devices, the demand for semiconductors has widened over the past decade into several markets such as smartphones, tablets, consumer electronics, the Internet of Things (smart thermostats, video doorbells and LED lights) and now the automotive industry - particularly for electric vehicles, driver assist and safety features. According to Gartner, globally PC shipments declined by 16.2% in 2022, however worldwide semiconductor revenue increased 1.1% - a dichotomy which would not have occurred 15 years ago.9

As can be seen by recent government initiatives such as the European Chips Act and the US Chips Act (the latter has signed into law the intention to spend $280bn into the industry over the next 10 years), the semiconductor industry remains critical to the global economy emphasised by the shortage seen over the past few years.10


Cybersecurity is also a critical issue which has come increasingly under the spotlight as more people work from home and more transactions are conducted online. And malicious cyber activity such as ransomware, phishing and intellectual property and data theft are unlikely to ease even during a global economic downturn. Cyber security specialists have been recently citing “unprecedented demand” as more companies move to cloud-based computing; according to McKinsey, the costs related to cybercrime will reach $10.5trn a year in 2025.11

As such we expect to continue to see robust spending around cybersecurity as companies face increasing threats to access their data and systems. Firewalls, email protection, cloud-based security and vulnerability management are all important aspects to cybersecurity. 

An abundance of opportunities

Technology has always influenced society and corporate strategy but the pace of adoption by both consumers and industry has never been faster than it is now, providing a high degree of long-term growth potential. It is essential to drill into all the information behind the growth – the quality of that growth, its sustainability, and the leverage a business can deliver.

The situation today is a far cry from the backdrop which led up to the dotcom crash at the turn of the century when prices soared. In 1999 many technology firms were experiencing unsustainable growth and being rewarded with valuations which were anything but realistic given their lack of both revenues and customers.

Today’s technology firms have very real revenues, profits and clients – they enjoy strong cash flow generation and many still have very large markets to address. When COVID-19 first hit, there were elements of tech spending that accelerated, especially those enabling businesses to continue operating and their employees to work from home. Many longer-term projects were put aside, but now they are coming back online. In our view, the technology sector remains awash with opportunity.

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