US economy: Innovation is key

My view of whether the US information technology (IT) sector is a good investment is coloured by the fact that I am, as a technology analyst, a booster of the overall segment professionally. That having been said, I do see that some areas and individual companies are more promising than others.

I hold a basic belief that IT remains one of the healthiest sectors in the global economy. At 35-odd years old, it is also one of the youngest industries and continues to attract money and talent. It is constantly morphing and evolving as new ideas supplant old ones. Apple, the most valuable company on earth right now, is merely the most obvious success. Many smaller companies such as Yelp, a location-based restaurant and entertainment review site, younger companies such as Salesforce.com, a customer relations software firm, think-outside-the-box companies such as Google, and older but more diverse companies such as IBM also contribute to industry ferment and capital formation.

But if I’m optimistic about the sector overall, my feelings about individual companies and markets cover the spectrum.

For example, the rise of high-mobility devices—smartphones, tablets, and very light notebooks—implies that the fortunes of those on board are brighter than those that have missed the boat. Companies licensing processor designs from ARM Holdings, such as Apple, nVidia and Qualcomm, look better right now than Dell and Hewlett Packard, which are working with traditional PC designs from Intel and Advanced Micro Devices.

As a key supplier of technologies for the waning PC market, Microsoft is on an ebb tide but has fielded a strong offering in high mobility in the form of Windows 8 and Windows Phone 8. Success is not assured, but early returns are promising. Meanwhile, it continues to mint money with its traditional franchises and its substantial positions in the enterprise and cloud markets.

Some companies are trying to diversify and evolve their businesses, but are rooted in what could be thought of as the modern rust belt of IT: the big iron purveyors such as EMC (storage), and Cisco (networking); the expensive proprietary software firms such as Oracle (databases).

More recent arrivals on the scene, including Google, Facebook and LinkedIn, were formed to address the latest wave of innovation—social, crowd, mobile, cloud. These firms are creating excitement, jobs, and new revenue streams; they are vortices drawing young talent and capital even as other technology segments languish.

Silicon Valley in the San Francisco Bay area has entire cities and towns devoted to bringing new ideas to market: Sand Hill Road in Menlo Park for venture capital, Stanford for scientific talent, Santa Clara for silicon development, Redwood City for databases, and the list goes on.

Small companies are popping up every day, trying their hand at the potentially next big thing.

The question for investors, then, is: how can one find the firms with the best prospects and get involved with them? Alas, there is no one answer. There are some overlooked gems in the public markets, but many of the best outfits are being privately financed. Private equity pools have become important kingmakers in the US IT market.

But this sector has years of growth, evolution, and innovation in front of it.