Industry and Sector Analysis: IT

Estimated read time: 5 minutes

Our lives are more entwined with technology than ever before. Trends suggest we're only going to continue craving the newest devices to increase our productivity and maximize our entertainment.

Still, as an investor, the information technology sector is not immune to dips, as we saw last year. Here's an overview of what to watch in IT stocks through 2019.

Industry Outlook Summary

Most analysts on Wall Street expect IT stocks to do at least as well as the overall market throughout 2019. Tech stocks spent years skyrocketing, seemingly immune to factors weighing down other market sectors. 2018 snapped the tech world out of that dream. Tech dipped just as hard as many other sectors at the end of the year, which had some making comparisons to the 2000 tech bubble. Now tech is climbing out of that dip, and investors are starting to feel like it's safe to return.

The tech outlook remains solid in part because FAANG bulls are hard to argue with. "FAANG" refers to five of the biggest tech stocks today; Facebook, Amazon, Apple, Netflix and Google (or Google's parent company, Alphabet). Those companies have carved out unique spaces for themselves in the economy. In some cases, these are spaces that didn't exist before these companies came along. Even if investors aren't doubling down on tech right now, they aren't selling either.

One tech field that could see significant growth in 2019 is IaaS, otherwise known as Infrastructure-as-a-Service. IaaS companies are an essential aspect of cloud services, which is taking off for both personal and professional use. Major tech companies like Amazon and Microsoft have already invested heavily in IaaS, with AWS and Azure, respectively. They've seen those investments pay off with rapid growth. AWS posted sales growth of 45 percent in its latest report, and Azure grew by 76 percent. IaaS can be rewarding during any broader economic downturns.

External Influencers

As workplaces become more automated, IT companies stand to benefit greatly. As technology gets integrated into workflows, it generates sales and creates jobs in the IT sector that keep the new technology running smoothly. But how much will companies invest in new technology? How satisfied will they be with it? How quickly will they move services to the cloud and automate tasks? Those are the factors that will determine how much of a benefit this external influencer becomes. For example, rising minimum wages in the U.S. have made automation more appealing for companies looking to cut operational costs. In parts of the world where labor is extremely cheap, there's less incentive to automate workflows.

Like most market sectors, IT is also susceptible to the economic woes that stem from trade disputes. Even before the tech stocks dipped in the second half of 2018, analysts were worried how the China-U.S. trade dispute would hit tech. Those fears materialized later in the year. If tensions continue to rise, tech stocks will continue to hurt from it, but we can also expect to see tech stocks jump as international relationships thaw.

Another reason for 2018's tech slump was rising concerns about data privacy. Controversy over who sells what information about you, and who they sell it to, led to new laws in Europe and Congressional hearings here in the U.S. If lawmakers decide to create new regulations, it could hamper IT growth. Even without regulations, increasing concern about data privacy could become a lingering issue and a drag on the sector.

Technology and Associated Risk

Unlike other market sectors, IT companies more or less control technological developments. To get a good idea of how much technological progress will be made in 2019, look at estimates for capital expenditure. That includes money spent on developing new technology. Last year started off with IT companies leading the economy in capital spending, but as the economy soured, spending trends shifted. Keep an eye on those levels because when they start to rise you can expect tech stocks to reap the benefits.

While some IT stocks are established giants in dependable fields (think chip manufacturers like Intel), other companies are new players in a brand new game (think VR and artificial intelligence). Those new fields present opportunity for growth, but they also run an increased risk of disruption. New companies could radically change those landscapes and unseat a company that had appeared poised to dominate a new technology.

How to Invest in IT

Once you know you want to invest in IT, you have to decide how to invest your money. Most of the tech stock headlines you'll see on the front page will concern FAANG stocks, but those are just a slice of the IT pie. They're a slice that doesn't even cover all the fields that fall under the IT umbrella.

Hardware and equipment

These are the companies make the devices and components that bring technology into our daily life. The computer or smartphone you're reading this on is an example of the type of product these companies produce. Hardware also includes less sexy devices like internet routers and motherboards. Electric instruments also fall under this category. Apple is a FAANG stock that classifies as a hardware company, though the company recently signaled it's shifting its focus to software and services.

Software and services

These are usually lumped together since that line is sometimes blurred in the world of tech. It's common for companies that create internet software to also provide internet services.

One of the most popular forms internet services right now is streaming, including the FAANG company Netflix. Facebook and Google, two more FAANG stocks, also specialize in internet services (social media and search engines, respectively). The final FAANG stock, Amazon, straddles internet service and retail sectors as an e-commerce giant.

Services also includes IT consultants, like the kinds that fix your computer at work. Software ranges from operating systems like Windows and iOS, which make our devices easy to use, to entertainment software, which we use to play video games.

Semiconductor manufacturers

These and related companies are the ones responsible for making the little pieces that come together to create the devices and software we love so much. Semiconductors are materials like silicon that are ideal for controlling electric currents. These companies also intersect in an interesting way with the energy sector. Solar power has become a driving force in renewable energy growth, and solar panels qualify as semiconductor equipment.

IT ETfs

Those interested in adding chunks of IT stocks to their portfolios en masse will want to check out IT ETFs. You'll have to pick between a broad approach or a specialized one. Some specialized ETFs offer only specific exposure, like the Market Vectors Semiconductor ETF (ticker: SMH). If you want broad IT exposure you can try the Vanguard Information Technology ETF (ticker: VGT) or the Fidelity MSCI Information Tech ETF (ticker: FTEC).

A Safe Bet

Unfortunately, any investors hoping to seize on the opportunity of skyrocketing tech companies may have missed the boat. Most likely, IT will simply reflect broader market trends in 2019. Companies like Amazon and Google are huge, but their growth isn't expected to shoot up dramatically. They're most likely as safe a bet as anything on the market.