Our Outlook for Technology Stocks

--Current near-term economic uncertainty is presenting a buying opportunity in higher-quality names.

--In an environment of tightening corporate IT budgets, we would look to invest in attractively valued firms that sell mission-critical products with recurring revenue streams attached. The software industry is a natural hunting ground for firms with these characteristics.

--Cloud-based services and mobile computing will continue to be major disruptive forces within IT. Hardware firms will be forced to adapt in a rapidly shifting landscape.

The Nasdaq fell nearly 13% from the end of the second quarter through Sept. 22, as macroeconomic uncertainty and disappointing outlooks from a number of hardware and semiconductor firms weighed on market sentiment. 

Weakness from large firms like Dell DELL and HP HPQ are to be expected given secular headwinds for PCs and ongoing pressure on public sector budgets. However, even smaller, higher-growth companies with exposure to prominent secular trends, like Cavium CAVM, Riverbed RVBD, F5 FFIV, and Juniper JNPR, provided a muted outlook relative to previous expectations.

Software and services firms have yet to show signs of weakness, with Oracle's ORCL reasonably solid results serving as our most salient data point. However, Oracle's software business is benefiting from firm-specific strengths, and it is too early to extrapolate the company's results into broader resiliency. At this point, it is beginning to feel like we are experiencing a typical cyclical slowdown in tech--weakness in semiconductor firms and hardware companies first, with software vendors and services firms following later.

This near-term uncertainty has created a number of buying opportunities across our coverage, and we are currently finding the most value among large-cap firms with durable competitive advantages. Given the current uncertain macroeconomic outlook, we see little reason to look beyond these high-quality, attractively valued large-cap firms; and we highlight five of our favorite ideas below.

Industry Level Insights