‘Big Data’ Expansion = ETF Opportunity

September 02, 2014

With technology spending increasing in just about every pocket, investing in tech looks like a no-brainer.

This article is part of a regular series of thought leadership pieces from some of the more influential ETF strategists in the money management industry. Today's article features Ron Saba, senior managing director of Investment Management at Charlotte, N.C.-based Horizon Investments LLC.

Running the gamut from smartphones to tablets, software to PCs (yes, even PCs), technology is an attractive sector for investment.

How's that, you wonder? Technology stands to benefit from an improving macroeconomic environment, new and promising business opportunities like "big data" and "cloud computing" solutions. Moreover, underlying company valuations stand at attractive levels, particularly given current growth prospects.

Before getting too deep in laying on the investment thesis here, I want to be clear that while there are different ways and different funds that might be useful to investors, we tend to favor a broad approach to this information technology (IT) opportunity using a large and very liquid ETF such as the Technology Select Sector SPDR Fund (XLK | A-78).

That said, let's look more closely at just how significant this opportunity is.

Increasing IT Spending

According to PricewaterhouseCoopers' July 2014 manufacturing barometer, 33 percent of industrial manufacturers plan to increase spending on information technology over the next 12 months, up from 28 percent the same time last year. Furthermore, research by Gartner shows global spending on enterprise software is expected to rise more than 6 percent this year, while spending on IT services as a whole will likely grow 4 percent.

The semiconductor industry is showing clear signs of this increased demand and growth. One example is improving book-to-bill ratios among chipmakers, which measures orders received relative to units shipped and billed. Specifically, the global semiconductor equipment manufacturing book-to-bill ratio of 1.17 is at its highest level in recent years, a 19 percent increase from its level just a year ago.

The increase in demand is also helping utilization rates in semiconductor fabrication plants, driving gross margin improvement at these firms. Specifically, DRAM and flash memory chips are posting the highest growth in the industry, up 33 percent and 22 percent, respectively, in the most recent quarter. Another often overlooked example is the automobile sector, which is also becoming a growth driver for many semiconductor manufacturers.

Digital chips and DRAM applications for autos grew more than 30 percent in the most recent quarter. It should come as no surprise, then, that Intel, Seagate and Qualcomm have all suggested that second-half earnings-per-share growth will be strong for PCs, storage drives and phones.

'Big Data' Revolution

Another area of technology benefiting from a recent surge in demand is so-called big data. Firms are clearly ramping up their IT spending in an attempt to stay current with the latest improvements.

In 2014, $15 billion is expected to be spent on big data technology compared with less than $10 billion two years ago. Spending growth in the big data space is expected to be an annualized 27 percent over the next five years, compared with 4.5 percent growth for overall IT spending. New software tools, like Microsoft's Azure Intelligent Systems, are helping to fuel growth by streamlining data analysis processes.

Software delivery using the "cloud" is also gaining momentum and is one of the key drivers of software spending. Global cloud software revenue is expected to grow 25 percent to $35 billion in 2014, and is projected to expand at a 22 percent annualized growth rate through 2017, according to IDC data.


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