Information Technology has faced a period of heightened volatility this year after nearly a decade of leading the market expansion since March 2009 lows. Concerns regarding slowing corporate earnings growth, inflated stock valuations, heightened regulatory pressure, and sector-specific headwinds like a downturn in the once red-hot chip industry, have dragged many IT stocks into correction territory. Nonetheless, some market leaders prevailed, with the leading IT stock almost doubling its value and the fifth best-performing stock posting a 36% return this year.
The S&P 500 Information Technology sector gained a modest 2.1% year-to-date (YTD) through Dec. 17, 2018, a significant deceleration from multiple years of generating stellar returns for tech investors, and yet still outpacing the broader S&P 500’s 4.8% decline.
Looking Ahead at Information Technology
Looking ahead, some bears are forecasting tougher times for U.S. tech giants, recommending that investors turn to more defensive names and circle back to value plays. Others view the series of sell-offs as an opportunity to buy high-growth tech stocks at a discount before they rebound in 2019. Broader industry trends such as autonomous vehicles, the Internet of Things (IoT), open source software, cloud computing, machine learning, and bigger spending on enterprise software are seen as growth drivers into the new year.
It’s important to note that earlier this year, the tech space was shaken up by a reclassification of some heavyweight companies into another industry classification. Stocks including Alphabet Inc. (GOOGL) and Facebook Inc. (FB) have moved from Technology to the new Communications Services sector.
Here are the five IT companies that have managed to outperform the rest, based on their stocks’ performance against the S&P 500 in 2018.
1. Advanced Micro Devices, Inc. (AMD)
- Market Cap: $19.9 billion
- 2018 Stock Performance: +83%
2. Fortinet, Inc. (FTNT)
- Market Cap: $11.6 billion
- 2018 Stock Performance: +60%
3. Red Hat, Inc. (RHT)
- Market Cap: $31.1 billion
- 2018 Stock Performance: +47%
4. Keysight Technologies Inc. (KEYS)
- Market Cap: $44 billion
- 2018 Stock Performance: +44%
5. Motorola Solutions, Inc. (MSI)
- Market Cap: $20.7 billion
- 2018 Stock Performance: +36%
Advanced Micro Devices – AMD
Chip industry stock Advanced Micro Devices Inc. (AMD) posted an 83.2% return in 2018, bringing its three year gain to a whopping 700% as it steals market share from legacy industry leaders. The Santa Clara, Calif.-based semiconductor company, which makes computer processors and related technologies for business and consumer markets, saw its stock peak in September near $34 per share after hitting a low around $9 in May. AMD shares are down about 44% from their 52-week high through Dec. 17, as the rest of the tech sector suffers a severe downdraft.
Bulls cheer AMD’s strides against Intel Corp. (INTC) in the PC and data center markets, as well as its gain on Nvidia Corp. (NVDA) in the discrete graphics cards market. The $19.9 billion company will have to maintain high growth rates in order to justify its valuation, trading around 30 times expected earnings. Growth opportunities across industries such as automotive and inference technology, and machine learning could boost the stock higher in 2019.
Fortinet – FTNT
Cybersecurity company Fortinet Inc. (FTNT) develops and markets cybersecurity software and appliances and services including firewalls, anti-virus, intrusion prevention, and endpoint security. Despite falling nearly 28% from early October highs, shares of the 18-year-old company have more than doubled over the last two years.
In November, Fortinet plunged over 13% despite strong Q3 results and upbeat guidance for Q4, in which revenues are expected to increase 19% and earnings by 60% year-over-year (YOY). While shares trade at a lofty 99 times earnings, compared to the broader S&P 500 company’s price-to-earnings ratio of 21 times, bulls continue to view Fortinet as positioned for long-term success in the high growth cloud security space.
Red Hat – RHT
In October, legacy IT giant, International Business Machines Corp. (IBM), announced a US$34 billion takeover of open-source software company Red Hat Inc. (RHT). The Raleigh, NC-based firm, which serves enterprise clients, saw its shares spike on the news, bringing their YTD performance to 46.5% through Dec. 17.
The $31.1 billion company grew its revenue by 21% YOY to reach $2.92 billion in fiscal 2018, while posting $259 million in profits. The firm is seen as benefiting from a broad shift to open source software. This trend also explains Microsoft Corp.’s (MSFT) $7.5 billion purchase of code-sharing service GitHub and Salesforce.com Inc.’s (CRM) $6.5 billion takeover of MuleSoft. Within IBM, RedHat can scale its business of aiding enterprises in their transition to the cloud, tapping deeper into the burgeoning hybrid cloud market, wherein legacy enterprises are swiftly moving away from bulky on-premise data centers.
Keysight Technologies – KEYS
Keysight Technologies Inc. (KEYS) is an electronics test and measurement equipment and software company based out of Santa Rosa, Calif. The company, which spun off from Agilent Technologies in 2014, saw its shares jump in November on better than expected fiscal Q4 results. Revenue rose 19% YOY to $1.05 billion and adjusted earnings increased 42% to $1.05 per share. Management was positive about expanding into key growth sectors including 5G, the IoT, next-generation wireless, high-speed datacenters, automotive, and energy. CEO Ron Nersesian cited a record $3.9 billion in revenue for 2018, noting that Keysight would “continue to see broad-based momentum across multiple end markets without solutions.”
Other top-line growth drivers include new collaborations, an expansion into the Asia Pacific and the adoptions of the firm’s 5G testing and design solutions. Shares of Keysight, up 44% YTD through Dec. 17, reflect a market cap at $11.5 billion.
Motorola Solutions – MSI
Data communications and telecommunications equipment provider Motorola Solutions Inc. (MSI) began trading as a separate independent company in Jan. 2011, succeeding the old Motorola Inc. The company has managed to withstand 2018’s volatility, benefiting from a period of strength for the larger wireless equipment industry. An escalation in demand for wireless services has led providers to undertake massive network extensions and upgrade plans, boosting business for companies like Motorola Solutions. Shares remain 8% lower than their 52-week high and reflect a 36.4% increase YTD.
The impending 5G boom, slated to support an ultrafast connection in the next-gen IoT era, is likely to propel the wireless industry to higher highs, spelling good news for the $20.7 billion company. For the current fiscal year, Motorola is expected to post earning up 28% YOY at $6.98 per share and on revenues up 14.6% at $7.31 billion.