While many mention that markets are fairly valued, there are pockets of opportunity even among the larger technology names. However, knowing what to look for, and how to skillfully execute will be extremely tough in an environment of rising P/E values, competitive challenges, and unknown risks. While economic growth is starting to accelerate, success with technology is primarily driven by positioning, innovation, and execution. So in this article, I want to cover the top ten technology companies/trends to look out for in 2014.
Top ten technology trends and companies of 2014
- Apple (AAPL) and its return to revenue growth will remain a key-event that investors should look for in 2014. Analysts on a consensus basis expect revenues of around $184.26 billion for fiscal year 2014. Many value investors were lost with Apple and were unfamiliar with growth investing, so they stuck with valuation methods to emphasize a case for buying Apple stock. However, I take a very different stance, and believe that any valuation, whether factoring in cash or not, is largely irrelevant if Apple cannot sustain the growth of its mobile business. This concern has been largely mitigated going into 2014 as Apple has finally completed its deal with China Mobile (CHL). A key trend to watch for Apple in 2014 is revenue growth.
- BlackBerry (BBRY) has drummed up a lot of speculation right before the beginning of 2014. Its recently hired CEO, John Chen, has detailed plans of a turnaround that should eventually result in profitability by fiscal year 2016. This was driven by plans to generate further cost efficiencies through a partnership with Foxconn (OTC:FXCOF), and reduction of non-essential expenses. The company will be pursuing the enterprise business and has unique information technologies that can be used in conjunction with private networks. The potential synergies with private or public cloud are also interesting. A key trend to watch for in 2014 is whether BlackBerry can further improve its profitability.
- There has been a leak that Intel's (INTC) mobile CPUs will be coming in the 1st quarter of 2014. It will be interesting to see if Intel will be able to generate market share gains against well-entrenched competitors like Qualcomm (QCOM). BayTrail CPUs for tablets will cost $32 keeping Intel price-competitive. So in summary a key trend to watch for in 2014 is Intel's mobile segment.
- Infrastructure-as-a-service cloud (IAAS) is projected to grow by 29% in 2014, and is expected to sustain significant momentum at the expense of more traditional network infrastructure players like International Business Machine (IBM), Oracle (ORCL), and Cisco (CSCO). The key trend to watch for is further migration of network infrastructure to the cloud resulting in lower sales from hardware. The marginal profit from cloud is substantially lower than selling computing hardware and is expected to have a negative impact on companies that depend heavily on wasteful IT (information technology) spending. Some of these fears have been alleviated with Oracle's recent beat on earnings, but it's not likely to be very sustainable. In 2014 investors should remain cognizant of further migration to the virtual cloud and position themselves with companies that are likely to prosper.
- Amazon (AMZN) closed at $402.92 and trades at a 58.1 price to cash flow ratio. The stock has been able to sustain an up-trend and many are left wondering if Amazon can sustain such an expansion in value without any meaningful improvement to financial performance. In the past year alone, investors have bid up the value of the stock, because of international sales growth, technology improvements in supply chain (with the hopes of using drones in the foreseeable future), along with continued growth in Amazon Web Service (cloud). I wouldn't expect further expansion of bottom line earnings growth going into 2014 as every year is an investment year at Amazon. So the key takeaway for 2014 is whether Amazon's valuation has exceeded the fundamental justification for owning the stock.
- Storage demand is expected to grow to 1,000 exabytes by 2014. With data demand expected to grow at a 34% compound annual growth rate through 2020, investors are becoming increasingly interested in the data storage space. The expected demand for data storage has caused Western Digital (WDC) and Seagate Technology (STX) to appreciate by more than 80% year-to-date. So a key trend to watch for 2014 is rising data demand.
- The consumer PC market is expected to contract by around 3.8% in 2014 (laptop and tower). Companies like Microsoft (MSFT), Hewlett Packard (HPQ), and Apple are still dependent on consumer laptop and desktop PC shipments to sustain earnings growth. Microsoft's CFO sees some stabilization in PCs, and if the market does indeed stabilize in 2014, investors may decide to jump back into pure PC plays like Hewlett Packard, AMD, NVIDIA (NVDA), and Intel. So PC demand will be a key trend to watch for in 2014.
- The Alibaba IPO is expected to happen in the first quarter of 2014. Yahoo! (YHOO) currently owns a 20% stake in Alibaba. Investors are eagerly awaiting this IPO as it's expected to increase the value of Yahoo! significantly. Yahoo! stock has appreciated by 101.61% year-to-date. The appreciation was driven by Yahoo's! cost-cutting, share buyback plan, and speculation over the Alibaba IPO. The expected value of Alibaba is $100 billion at IPO, which will result in Yahoo's goodwill from Alibaba alone to reach $20 billion. If Alibaba is worth more than $100 billion at IPO, Yahoo! stock will move to reflect that additional gain in market valuation. The Alibaba IPO is a key event to watch out for in 2014.
- Google (GOOG) is expected to release the Google Glass in 2014. Wearable computing isn't expected to be a large market in the beginning. But if Google can prove that its first generation product can be successful commercially, or if demand surpasses expectation, the stock should exhibit additional upside from that alone. If Google succeeds, competition will definitely heat up in the space. However, there's also the risk that Google could end up looking like Samsung (OTC:SSNLF) with its Galaxy Gear. So going into 2014 wearable computing will remain a key segment to watch out for.
- The console war will continue between Sony (SNE) and Microsoft. It seems that Sony is slightly pulling ahead in unit sales; however we'll have more conclusive information when both Sony and Microsoft reports fourth quarter earnings in Q1 2014. In the meantime, development studios are in the early stages of the console refresh cycle and will have to invest aggressively in game development right now in order to capitalize on the mid-cycle of the console generation. Investors should keep an eye on the amount of cash spent on product development from game studios like Electronic Arts (EA), Take-Two Interactive (TTWO), and Activision Blizzard (ATVI) in 2014. Investment in game development will be a healthy indicator for future console demand.
2014 is going to be an exciting year for technology investors because of wearable computing, cloud, consumer PCs, mobile, electronics, IPOs, data consumption, frothy valuations, corporate turnarounds, M&A, partnerships, and etc. Technology will be challenging, there will be big winners, and big losers in the space. Investors should continue to dig, and look for opportunities in the technology sector, because there will be plenty of money to be made and lost in the changing environment.