- While mega-cap tech stocks get ever larger, Mark Haefele of UBS sees more opportunity elsewhere.
- He says some mid-size tech stocks can beat companies like Apple, and even the entire sector.
- Apple, which became the first $1 trillion stock in mid-2018, briefly hit $3 trillion this week.
The market cools on Apple (AAPL) from time to time, but it always comes back. That helped the tech giant become the first stock to reach a market cap of $1 trillion, then $2 trillion, and it rang in the new year by hitting $3 trillion earlier this week.
But is Apple the best tech stock to invest in today? Not according to Mark Haefele, the chief investment officer for UBS Global Wealth Management. He argues that Apple and its mega-cap peers like Microsoft (MSFT), Nvidia (NVDA), Alphabet (GOOGL), and Tesla (TSLA) aren’t the best way forward.
“We no longer see them as the best place to look for outsized returns in the tech sector,” he said of those companies. “We expect more value to come from artificial intelligence, big data, and cybersecurity — the ABCs of tech.”
Haefele says investing in those three themes should deliver 10% annual revenue growth and 16% annual earnings growth through 2025. He expects mid- to high-single-digit revenue growth for the tech sector over that period, which is very respectable, but less impressive.
He says the way to access the ABC themes — and his fourth pillar, 5G — is by buying mid-size companies.
Haefele’s most optimistic projections concern artificial intelligence, as he thinks that market will grow 20% a year through 2025. He cites work by the firm Gartner that indicates companies will primarily use the technology to improve experiences for customers, improve efficiencies, and find new sources of revenue.
One of the most popular AI-related ETFs is the Robo Global Robotics and Automation ETF, and its top components include Intuitive Surgical, Kardex, and Harmonic Drive Systems. The biggest holdings of the Global X Robotic and Artificial Intelligence ETF include Nvidia, Keyence, and Intuitive Surgical, while the ARK Autonomous Technology & Robotics ETF holds companies including Tesla, Trimble, and UiPath.
(2) Big data
Haefele says the market for big data solutions should grow at an 8% annual clip over the next few years. Further out, he believes global data capacity will rise more than 900% between 2020 and 2030 because of growing internet adoption and increasing data usage in populous countries like China, India, and Indonesia, as well as the spread of the Internet of Things.
Exchange-traded funds focused in that space include the ALPS Disruptive Technologies ETF, which counts Splunk, Experian, and TransUnion among its biggest data and analytics holdings, and the ProShares Big Data Refiners ETF, a fund whose largest positions are Datadog, MongoDB, and Dynatrace.
Haefele projects 10% annual growth for the cybersecurity industry through 2025, and says that the business “is also one of the most defensive segments within IT; spending on it has limited downside, as seen in 2020, due to its importance.”
The growing importance of cybersecurity helped stocks throughout the industry during the pandemic, and it has contributed to stronger growth for the sector compared to other types of business IT spending.
The largest ETFs in that space include the First Trust Nasdaq Cybersecurity ETF, which counts Accenture, Cisco Systems, and Palo Alto Networks as its biggest positions, and the Global X Cybersecurity ETF, which is topped by Palo Alto, Check Point Software Technologies, and Fortinet.
Finally, Haefele say earnings for companies that enable 5G and for platforms that benefit from 5G could grow around 15% a year over the next three years. He adds that the spread of 5G will contribute to growth in AI, big data, and cybersecurity as well.
Funds that give investors broad access to that theme include the Defiance Next Gen Connectivity ETF, which has investments in Qualcomm, Advanced Micro Devices, and Analog Devices, and the First Trust IndXX NextG ETF. Top holdings of that fund include Broadcom, HCL Technologies, and LG Electronics.