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Quarter-End Insights

Tech and Telecom: M&A Heats Up, and the Cloud Changes the Landscape

Mergers and acquisitions are ramping up (as are rumors), but with the sector slightly overvalued, we stick to fundamentals and seek firms with established economic moats.

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  • Foreign exchange will still have an impact on 2015 results, but we haven't seen it affect the tech spending environment all that much; the sector still looks 5% overvalued, and we'd be selective.
  • We expect spending on cloud applications to grow nearly 20% annually to reach $62 billion by 2019. Improving sales and marketing efficiency will drive significant operating leverage at many software-as-a-service firms.
  • Semiconductor mergers and acquisitions are heating up, with high-profile deals at  Intel (INTC) and  Broadcom (BRCM).
  • The telecom market overseas is still consolidating; European activity is being led by convergence but still may slow following the appointment of its new antitrust chief.

Despite a modest increase for the S&P 500 through the first half of 2015, it hasn't been a particularly smooth ride for investors. Performance for the technology sector in aggregate has been slightly stronger, up around 3%, but there were notable areas of strength and weakness. Global currency movements over the past two quarters have resulted in slightly elevated volatility across both the technology and communications-services sectors, but the overall tone from management teams has been fairly positive in terms of the macro environment. In aggregate, we view the tech sector as slightly overvalued and remain selective in our picks.

Peter Wahlstrom has a position in the following securities mentioned above: AAPL, INTC, MSFT. Find out about Morningstar’s editorial policies.