Tech firms have a lot on their minds. An analysis by accounting and consulting firm BDO of annual shareholder reports filed by the top 100 tech companies found cybersecurity was cited as the top risk factor by 100% of firms, tied with the various federal, state and local regulations they must comply with.
But large percentages of respondents identified a long list of other concerns they’re dealing with. They’re worried about competition and managing their M&A efforts (98%). They’re worried about threats to their overseas business (96%). They’re worried about the economy in the U.S. (95%). Suppliers and vendors present their own risks (92%). Not for nothing, being able to predict what customers want and provide it is troubling (90%), and hey, what if a natural disaster, war or terrorist attack disrupts business? Ninety percent of tech companies cited that as a risk factor.
Three-quarters of firms reported uncertain financial performance as a chief risk, the report found, and for good reason. BDO called 2016 a “turning point for the industry” as tech stocks released disappointing earnings in the first half. As of June 15, the S&P 500 information technology sector is down 0.73% year to date and 2.84% for the second quarter.
Tech IPOs have also disappointed, according to BDO, with 80% of firms that launched in 2014 or 2015 trading below their first-day closing prices.
On the other hand, the report cited Dow Jones VentureWire, which found U.S. venture funds raised $13 billion in the first quarter and tech M&A reached over $100 billion in deal value for the same period.
“Growth is no longer a foregone conclusion, and today’s tech investor is far savvier and more selective,” according to the report. “Tighter purse strings mean more competition to win limited investor dollars — and more pressure to seize the right opportunities and avoid making mistakes.”
Aftab Jamil, BDO’s technology and life sciences practice leader, told ThinkAdvisor that for the “medium term, the tech sector is poised to do very well, albeit with a little bit of a slowdown this year.”
“Depending on the subsector you’re in, your views might be different,” he said. “Investors are still very optimistic about the overall health of the tech sector. The VC funding [assets] are flowing in.”
Jamil noted that “the overall sense in the Silicon Valley area certainly is that [tech is] a robust sector that has been doing very well. Overall there are some macroeconomic headwinds,” such as the slowdown in China and Asia overall.
Software is one sector that’s performing better than others, including cloud-based software. “That’s doing very well. There’s been a lot of investment, driven by the consumer demand” for greater bandwidth to support all the different devices they use, Jamil said, such as the “Internet of Things; a lot of new devices that may be connected to that.”
All the companies that provide those services have to upgrade their data centers to meet consumers’ demands, he said, which “impacts a lot of different subsectors. Anyone who is selling what goes into guts of the data centers, be it the optical networking, communication devices or components that are needed in that software.”
Emerging markets are another source of opportunity as data centers there upgrade their systems. “There may be some temporary slowdowns here and there as timing gets pushed out,” Jamil said, “but in the next few years, that is something that is going to continue to happen because the bandwidth demand continues to increase.”
Semiconductors may be an overlooked opportunity for investors. “Consumers are not necessarily focused on those, but the semiconductors go into everything nowadays: cell phones, or cars or a lot of those connected devices.”
Jamil said he expects a little bit of a slowdown this year for that sector, but that “over the next couple of years, it’ll get back up there.”
Jamil said that overall, the tech sector could see between 7% and 8% growth – again, with the caveat that different subsectors might experience different growth rates – “which is good, but in comparison to what was happening in the last two or three years, it’s a little bit slower.”
— Read Silicon Valley’s Audacious Plan to Create a New Stock Exchange on ThinkAdvisor.