Information Technology (IT) companies have been among the best performers this year, with the Technology Select Sector SPDR ETF (XLK) up around 10% so far. What’s interesting here is that the strength isn’t just from the high flyers. Out of last year’s FANG (Facebook, Amazon, Netflix and Alphabet/Google) group, only Facebook (FB) has solidly beaten XLK, climbing about 20%.
Instead, that outperformance is coming from the “old tech” companies as they begin to reinvent themselves aided by favorable valuations, investors searching for yield and a recovery in the PC market after its slump in 2015. International Business Machines (IBM, +12%), HP (HPQ, +22%), Hewlett Packard Enterprise (HPE, +49%), Cisco Systems (CSCO, +14%) and Verizon (VZ, +11%) are among the large, old-tech companies that have come roaring back to life this year.
Given this rotation, overall IT spending is not advancing at a rapid rate. Consulting firm Gartner believes total global IT spending will be flat in 2016 in dollar terms, and up just 1.5% when adjusted for currency changes. In addition, IT spending growth is expected to average 2.7% between 2017 and 2020. I think this reflects the fact that most spending still gravitates to many of these old tech firms.
Now that’s not to say there aren’t any opportunities in the tech space. You just have to find the right pocket, and I see cloud computing as one of them. According to Statista, spending on public cloud infrastructure, which was $25 billion last year, is expected to surge to $126 billion by 2020. Software-as-a-Service (SaaS) and Platform-as-a-Service (PaaS) spending within this segment will increase from $8 billion to a whopping $32 billion, driven by the lower cost than the traditional client/server IT model.
Some of the old tech companies will be a part of this boom, with Morgan Stanley (MS) estimating that 30% of Microsoft’s (MSFT) revenues will come from the cloud by 2018, a big departure from the days when all Windows and Office programs were contained on a hard disk in a PC.
Big Data also has solid growth ahead of it. International Data Corp. found that spending on Big Data and business analytics software will increase 50% from the end of last year to 2019 as companies continue to mine data in an effort to have valuable information for marketing purposes. The major components of the spending on Big Data are expected to come from services and software.
The trend is clear—more and more companies are going to rely on cloud computing and Big Data to manage their massive networks in the coming years. Given the long-term potential of the sector, I think now is the perfect time to consider getting your foot in the door.