Digital transformation to drive growth across tech sector

As businesses look to engage with their customers in a more service-oriented and data-centric manner, Franklin Equity Group see significant investment opportunities in the leading ‘digital transformation’ platform companies, as well as technology vendors that enable their customers to digitally adapt and transform.

KUCHING: Franklin Equity Group believes that digital transformations within a country and amongst companies will drive strong earnings growth across the technology sector.

In his 2019 outlook, Franklin Equity Group vice president, portfolio manager, research analyst Jonathan T Curtis commented: “As businesses look to engage with their customers in a more service-oriented and data-centric manner, we see significant investment opportunities in the leading ‘digital transformation’ platform companies, as well as technology vendors that enable their customers to digitally adapt and transform.

“We believe digital transformation should drive strong revenue and earnings growth across the technology sector for many years to come.”

He pointed out that virtually all sectors are reshuffling their business models around information technology (IT) initiatives to remain competitive.

“We believe digital-centric businesses are more valuable than their legacy peers because they build service-oriented, recurring customer relationships informed by novel, organised and well-curated datasets.

“Non-digital businesses are waking up to the perils they face at the hands of digital disrupters, and many are now in the early stages of reinventing themselves through the adoption of digital tools such as artificial intelligence (AI) and machine learning (ML), cloud computing, data analytics, software-as-a-service (SaaS), e-commerce and fintech (technology-driven financial products and services, including digital payments), next-generation internet infrastructure, new media, robotics and the Internet of Things (IoT),” he explained.

In the near future, he noted that software applications and smart devices across all industries are likely to feature some form of embedded AI in them.

“We believe that digital transformation (DT) and its supporting sub-themes will drive consistency in secular growth trends for many years to come. Bottom line: DT is not something that many companies can afford to delay,” he highlighted.

Some examples of industries currently driving noteworthy DT initiatives include the taxi industry which is attempting to compete against ride-hailing services, brick-and-mortar retail industry which are embracing e-commerce techniques to better understand their customers and streamline their inventory/distribution, and the music industry, which is more widely implementing music subscription services following years of resistance.

“At the same time, we are cautious about investing in what we see as cyclical and or structurally impaired technology industries, some of which are being negatively impacted by DT,” Jonathan said.

These include legacy IT services, legacy systems software, branded enterprise IT hardware, and several categories in the consumer electronics domain.

“Outside of the pending 5G wireless upgrade cycle for mobile networks, we hold a negative view on telecommunications equipment companies due to end-market headwinds, a sharp increase in competition, and what we view as a poor market structure,” he added.

“Overall, we remain positive on the IT sector. First, enterprise IT spending is already quite robust. We see a path for that continuing into at least mid-2019, which will be the first full year of budgeting that takes into account a robust economy and the recent US tax cuts.

“Second, consumer IT spending appears stable amid expansion in services, new media and gaming offset by tepid growth in hardware such as smartphones and consumer personal computers.

“Third, many of the world’s largest cash-rich technology companies headquartered in the US are still in the early stages of increasing their capital return programs as a result of US corporate tax reform,” he said.

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