A recent bout of elevated volatility in the technology sector caught the attention of many investors. Not surprisingly, this led to some hand-wringing concerning valuations, the narrowness of the sector and the sustainability of growth rates. We, on the other hand, view much of the recent market movement largely as noise. In fact, we'd actually prefer to see greater volatility in the themes that, in our view, are dramatically reshaping the technology landscape over the medium to long term. Individual companies tied to secular growth themes stand to play out over years - not quarters. We believe stocks often tend to be more volatile than their underlying businesses.
One of the dominant themes reshaping not only technology but the sectors that rely upon it is the transition to the cloud and mobility. Our view toward semiconductors is driven, in part, by the rapid growth in connecting devices to the Internet, and thus, the cloud. A newer concept which excites us is artificial intelligence. Algorithmic machine learning will likely propel the technology sector as well as the productivity of the wide range of industries it serves. Underlying all of these drivers are data. The collection and analysis of data will not only provide novel solutions for existing industries, but also likely create entirely new businesses in the process.
It isn't just segments of the economy being transformed by technological innovation, it is entire countries. Consumers and businesses alike in China are rapidly adapting a digital first attitude toward commerce and other interactions, skipping many rungs climbed by advanced economies during the 20th and early part of the 21st centuries. Gaming is another technology segment benefiting from powerful tailwinds. Enhanced capabilities enabled by more powerful chips, mobility and mixed reality are revolutionizing the way games are designed and experienced.
Given these strong growth trends, we are comfortable with valuations across much of the sector. Of course there are exceptions, but increased share prices are largely driven by improved outlooks for growth rather than multiple expansion. In fact, we see acceleration in the quality of the fundamentals. This is an important difference between tech valuations in the late 1990s and today. At that time, stocks were priced off the "hope" of the Internet. Today's much more reasonable valuations are built off the reality of the Internet rewriting a new digital operating system for the entire global economy.
Given our view on the sector's prospects to grow revenues and create new markets, growth-oriented companies appear more favorable following the recent bout of volatility. As a result, we feel higher growth names leveraged to key sectors will likely drive the tech economy for years to come.
Technology industries can be significantly affected by obsolescence of existing technology, short product cycles, falling prices and profits, competition from new market entrants, and general economic conditions. A concentrated investment in a single industry could be more volatile than the performance of less concentrated investments and the market as a whole.
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