Fisher Investments on Technology

Chapter 5. CHALLENGES IN THE INFORMATION TECHNOLOGY SECTOR

When analyzing a sector, identifying opportunities is just half the battle. Smart analysis should also root out potential challenges and the risks those challenges pose to near and longer-term growth of the sector, and the individual industries and firms therein. Some challenges are universal to all sectors—like competition, higher taxes, integrating acquisitions, etc. Here, we will focus on three of the more significant challenges specific to Tech: product maturity and obsolescence, extreme fluctuations in supply and demand, and threats to intellectual property. Understanding the risk these challenges may present can help you make better investment decisions.

PRODUCT MATURITY AND OBSOLESCENCE

The Technology sector is typically characterized by fast-paced, constant innovation. But most "hot" new markets eventually face maturity and obsolescence. A groundbreaking product hits the market and experiences rapid growth. Witnessing its success, new entrants appear, wanting to get in on the action, developing variations of the product or new generations. Over time, the market becomes crowded and eventually saturated. Weaker players are then typically forced out or acquired.

This is evident with growth of computer sales. Proliferation of the Internet in the 1990s fueled rapid growth in computer hardware demand (not just PCs, but also servers and other infrastructure), but over time, the market became increasingly saturated. Figure ...