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By Peter Wahlstrom, CFA | 01-21-2015 04:00 PM

3 Themes We're Watching in Tech

Rather than chase the next highfliers, we gravitate toward tech companies with moats and exposure to growth areas such as social, mobile, and the cloud.

Peter Wahlstrom: All in, we view the technology sector as roughly 10% overvalued today. There are plenty of fundamental factors to look for, and we tend to gravitate toward companies that have sustainable competitive advantages, such as switching costs, network effect, or intangible assets. We'd much rather gravitate toward these types of firms rather than chase the next highfliers that don't generate any free cash flow.

There are a couple of themes that we are looking at in 2015 that continue to be on our radar. Number one is currency headwinds. Hewlett-Packard (HPQ), Oracle (ORCL), IBM (IBM), and Accenture (ACN) have all talked about currency headwinds this year, which could impact their top line by up to 500 basis points. Second, we are looking at the macro environment: Will things continue to slow in Europe? Will China continue to be the growth driver that many expect it to be? And third, we are thinking about themes, which should drive continued spending, such as social, mobile, analytics, cloud, and security. There are plenty of companies within our securities universe and technology space that should benefit from these underlying trends.

One secular trend is the growth in smartphones in emerging markets. Qualcomm (QCOM) is a company that benefits from a wide economic moat, has a solid balance sheet, and trades at a discount to our fair value estimate. This is a company that generates royalty income every time a 3G chip of theirs is put into a smartphone. A lot of the smartphone growth, again, is coming from emerging markets; but even as developed markets move to 4G and 5G technology, these phones need to include backward compatibility to Qualcomm's 3G chips, which we think lends itself to a long life and long free cash flow generation for the firm. 

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