5 IT Trends For The Next Twelve Months

As investors, it is important to monitor various industries and engage in ahead of the curve idea generation. The IT sector is going to be a very interesting space going forward. This uncertainty has been echoed by CEOs over the past couple weeks as earnings season kicked off and several blue chip IT companies released earnings. The next twelve months are going to be challenging for IT companies as the effects of the credit crunch are yet to be determined in regards to IT spending and it’s effects on both top line and bottom line growth. Going forward in the next twelve months, I think investors need to be aware of the following five trends to keep their IT investments profitable.

Aggregate IT Spending Will Decline

CEOs across the board are reporting uncertainty regarding corporate IT spending in the upcoming quarters. This is not surprising considering the economy is predicted to go into a recession, if it is not already in one. Firms will have to scale back on their technology related expenditures to weather the challenges brought forth by the recession cloud. It is important to have a large IT company on board that has a diversified revenue base so any weaknesses from one product or region can be offset. IBM (IBM) is a great bellwether with diversified revenues from all over the world, including 50 high growth areas. IBM has beat its Q4 revenues in its Business Services segment and has a great mix of both annual and long-term contracts. The recent run down in its share price has only made it more attractive to investors.

Semiconductors Are Your Friend

Semiconductors move on a cyclical basis, as the economy bottoms, so do the semis. It is concerning to see the likes of Intel (INTC) come out with soft revenue growth and an uncertain outlook, but it is coming close to a time where semiconductors are worth a look. This buying opportunity is great, especially with the diversification away from the common software services sub sector. For those who are weary of getting into the semis, I would even consider hardware connector makers such as Amphenol (APH) or instrument manufacturers such as Rofin- Sinar (RSTI). The demand for such components will not fade through a recession as companies continue to purchase connectors, wires, and other necessary components to fuel their business. An economic downturn is not a reason to halt all R&D spending at major companies such as Toyota (TM), Lockheed Martin (LMT), and AT&T (T) who must push through such times and stay on top with their emerging products.

Wireless Device Spending is Unpredictable

The whole Blackberry v. iPhone v. Android bit seems to be getting a bit ridiculous in a period where unemployment is high and consumer confidence is weak. The Android’s latest test run from the WSJ.com did not impress me and Blackberry’s Storm is less appealing since it lacks a true QWERTY keyboard. The new flip phone on T-Mobile is very affordable and offers users the power of the BlackBerry in a sexy flip phone body. I do believe the Bold will be RIM’s (RIMM) cash cow as it goes head to head with the iPhone 3G which is now behind times as the first 4G network went live this past weekend in Baltimore, MD. The variety of choices paired with the lack of discretionary income will keep wireless spending unpredictable. These companies have a very uncertain twelve months as many people opt to wait a year until they have more money to spend on the lavish offerings of next generation wireless devices.

A Focus on Infrastructure

The current information infrastructure is aging and will require serious upgrades as more powerful devices become available. The Telecom companies will shine here as will large IT companies that are beginning to tailor their businesses to address this emerging trend. The advent of 4G, fiber optic, and cloud computing are poised to change the world of computing as we know it. 4G wireless networks are emerging to render wireless 802.11 setups useless, although the likes of AT&T and Verizon (VZ) (whose parent is Vodafone (VOD)) need to step up along with Sprint (S) to create such an infrastructure. Fiber optic lines are being installed all around the country, offering fast pipelines for information flow. The real gem here is the emergence of cloud computing at major IT companies. With the digital information becoming increasingly accessible, clouds will need to be formed to process such data in the most cost effective and productive manner possible. The likes of IBM, Amazon (AMZN), Google (GOOG), and Salesforce.com (CRM) are setting up large data centers to help process data for businesses. Oracle (ORCL) and VMWare (VMW) also have potential to profit off the set up of such large processing “fields” going forward.

Expect Increased M&A Activity

I honestly do not think this is a hard one to predict after CEO Larry Ellison at Oracle blatantly said his company is on the prowl for undervalued companies. The magician of mergers is known to acquire smaller IT providers and seamlessly blend them into his current operating model. You can also expect Yahoo! (YHOO) in its current state to be an attractive target, especially after Ballmer made hints at another possible attempt to acquire the faded search engine. The current bear market provides opportunities for such companies flush with cash and favorable credit standings to strengthen their businesses through inorganic growth. This M&A market is yet to pop, and I think the statements from such industry leaders should be taken into account when investing. In the short term, such acquisitions do have the capability of destroying shareholder value, but the medium and long term, if executed properly, they will grow value.

Moving forward in the next twelve months, keep these major points in mind. It is important to stand firm and stick to your guns. Remember the basic tenet of investing: buy low and sell high, as IT gets run down to more attractive levels in the coming year. Blue chips as well as various growth stocks will become  feasible to purchase as the market bottoms out and the bulls prepare to regain control. The current market conditions should not be viewed as a threat, but as an opportunity for investment.

Disclaimer: The mutual fund the author is associated with is long GOOG and APH and has interest in purchasing IBM.

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