The technology sector as a whole is relatively broad and somewhat volatile, but the enterprise-tech sub-sector is expected to see prosperity, convincing many of the industry’s big players to bet big on it.
As momentum of a broader economic expansion picks up, the labor market starts to stabilize, business investment increases, corporate technology budgets increase and activity in mergers and acquisitions picks up, demand for enterprise computing will likely continue to improve.
These economic trends, combined with easy access to debt, an appetite for acquisitions and plenty of cash, have pushed technology titans International Business Machines (IBM), Oracle (ORCL), SAP and Cisco (CSCO), to restructure their overall business plans for the next few years to reap the benefits and stay bullish.
IBM plans on bulking up its software business and placing less of an emphasis on hardware services. CEO Sam Palmisano recently announced that the company expects to spend nearly $20 billion on software buyouts between 2011 and 2015. IBM has already started to enter the software market through its acquisitions of 57 different software companies over the past 7 years. This transitional focus is expected to enable the company to nearly double its profits by 2015.
Oracle is also thinking big as it plans to focus and build on its recent purchase of Sun Microsystems and target additional acquisitions in the chip maker, storage and hardware markets. A second area that the Redwood City, California-based company is expected to focus on is data warehousing, which will likely be a bolts-on feature to Oracle’s enterprise database, enabling it to gain broad market acceptance.
SAP is thinking just as big as IBM and Oracle as it recently unveiled its acquisition of Sybase (SY) in a $5.8 billion deal. The German outfit paid a hefty premium for Sybase to gain access and control over its compelling mobile-application technology for business software. Although highly unlikely that this acquisition will allow SAP to steal significant market share from Oracle, it is an innovative move.
Last, networking giant Cisco expects to see sunny days ahead as orders in every customer segment were up significantly year over year. According to John Chambers, CEO of Cisco, enterprise orders rose 25%, consumer orders rose 64% and public sector orders jumped 44%. As for the near future, Cisco expects that trends in corporate America as well as an improving global economy are likely to make these gains sustainable, resulting in increased profitability.
Ways to gain diversified exposure to these technology companies include the following:
- PowerShares QQQ (QQQQ), which boasts Oracle and Cisco in its top holdings. QQQQ closed at $46.93 on Friday.
- Software HOLDRs (SWH), which allocates 18.3% of its assets to SAP and 14.3% to Oracle. SWH closed at $40.49 on Friday.
- iShares Dow Jones US Technology (IYW), which holds IBM, Cisco and Oracle in its top holdings. IYW closed at $57.22 on Friday.
When investing in these equities, it is equally important to keep in mind the volatility involved with the technology sector as well as the inherent risks involved. To help protect against these risks, the use of an exit strategy which identifies specific price points at which an upward trend could come to an end is important.
According to the latest data at www.SmartStops.net, an upward trend in the mentioned ETFs could come to an end at the following price points: QQQQ at $45.06; SWH at $39.27; IYW at $54.13. These price points change on a daily basis as market conditions fluctuate and are reflective of market volatility.
Disclosure: No Positions