Invest in These Hot Tech Trends
Asking a group of IT investors to outline which technology is going to be the next big thing is unlikely to reach any kind of consensus. However, most investors are likely to agree to on two things: technology cycles are getting shorter, and IT is becoming ever more specialized. If you agree with these statement, it's time to examine which sectors and stocks are likely to benefit from these shifts.
Adam Smith Revisited
The great Scottish moral philosophers David Hume and Adam Smith pointed out that increasing division of labor would lead to greater productivity. The difference between their time and now is that workers' skills are becoming increasingly more refined. In addition, the intellectual quotient of a good's value (think of smartphones versus last decade's phones) is increasing. Moreover, according to an article in the Harvard Business Review: "Today, thanks to the rise of knowledge work and communications technology, this subdivision of labor has advanced to a point where the next difference in degree will constitute a difference in kind. We are entering an era of hyperspecialization."
Three investment themes benefit from hyperspecialization and shorter tech cycles.
Technology staffing companies
First, companies will be more inclined to hire temporary workers with highly defined skills, rather than spend large amounts to train in-house employees, or hire a project consulting firm. Indeed, that is exactly what technology-focused staffing firms like, Kforce or On Assignment are seeing. Quoting from its recent conference call, where On Assignment's CEO, Peter Dameris, said: "We're not saying that we're beating Accenture at project consulting. We're saying that the customer is deciding more often than not now that maybe they should do this on an IT staff aug basis, versus a project consulting basis."
Furthermore, when questioned on the opportunity for bill rates to increase (something likely to significantly improve On Assignment's profitability), Dameris replied that the skill sets it provides are becoming "more and more scarce." The facts back him up. For example, according to government figures, despite the number of college degrees issued in the U.S. increasing by 51% from 1992-2011, the increase in engineering degrees issued only went up 20%. That's a growth rate of less than 1% per annum, significantly below long-term GDP growth.
Shorter tech cycles also imply that companies need to remain current on business trends, and this is where the information services companies come into play. They allow companies to "outsource knowledge." With regard to IT trends, the best known name is Gartner . Indeed, Gartner has grown revenue by 6.8% and earnings per share by 14% per annum since 2008. This is an extremely impressive performance, given that 2009 was a recessionary year and Gartner operates in the highly cyclical IT sector. In addition, according to its management, the company has genuine pricing power and has "consistently increased our prices by 3%-6% per year on an annual basis since 2005."
Another company worth examining is Nielsen, a leader in provider insights into consumer behavior. Technology is significantly changing retail and media channels, and this is putting pressure on Nielsen's customers to monitor and analyze information across many different platforms. Think about social media, mobile, Internet TV, and video-on-demand. Plus, advances in communication are creating global opportunities for marketers, yet media continues to fragment. All of these factors are likely to provide good growth opportunities for Nielsen.
Moving to the cloud
The third key beneficiaries are likely to be cloud-based solution providers. If technology cycles are getting shorter and more specialized, it's likely that companies will want to buy solutions on a subscription basis. After all, why buy an expensive software solution if it's going to be outdated in a few years?
Adobe, Autodesk and Intuit are three leading names in this regard. Intuit is arguably the early mover with its TurboTax software, while Adobe has been transitioning is digital media and marketing software toward the cloud in 2013. However, AutoCad company Autodesk is probably the most interesting stock right now. Autodesk is shifting software sales from stand-alone products to software-as-a-service-based suites of bundled software. It appears to be working, as Autodesk reported 21% growth in sales in the third quarter. Autodesk believes in can generate 20% more value with its subscription customers.
The bottom line
IT trends are changing at an ever-faster pace, and the companies above have opportunities to profit. Frankly, they are all cyclical companies, but if you are a Foolish investor looking for a cyclical stock that can outgrow its markets, then these stocks are well worth a look.
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The article Invest in These Hot Tech Trends originally appeared on Fool.com.Lee Samaha has no position in any stocks mentioned. The Motley Fool recommends Gartner. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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