Investing in Technology
This sector groups industries that provide significant value to the consumer in the global economy.
MSCI
The Information Technology sector (Information Technology), according to the MSCI GICS structure, is assigned code 45.
Its classification is divided into three main industry groups, which in turn are broken down into various industries and sub-industries:
1. Software and Services (Code 4510)
This group focuses on the logic and services side of the technology ecosystem.
IT Services (451020): Includes IT consulting and other integration services, as well as Internet services and infrastructure (data centres, cloud networks and storage).
- Example: Accenture, IBM (services), Equinix, Digital Realty, Cloudflare, Akamai, etc.
Software (451030): Developers of application software (specialised for business or consumers, including bitcoin mining) and systems software (operating systems, platforms, databases and firewalls).
- Example: Microsoft, Oracle, SAP, Salesforce, Adobe, Intuit, ServiceNow, Snowflake, etc.
2. Technology Hardware and Equipment (Code 4520)
Covers the manufacture of the physical devices and electronic components needed for communication and data processing.
Communications Equipment (452010): Manufacturers of routers, modems, switches, fibre optic cables and radio and television transmission equipment.
- Example: Cisco, Juniper Networks, Arista Networks, Nokia, Ericsson, CommScope, etc.
Technology Hardware, Storage and Peripherals (452020): Manufacturers of personal computers, laptops, servers, printers, storage devices, ATMs and cryptocurrency mining hardware.
- Example: Dell, HP Inc., Lenovo, NetApp, Seagate, Western Digital, Canon, NCR, etc.
Electronic Equipment, Instruments and Components (452030): Includes test and measurement instruments, scanners, lasers, displays, electronic components (resistors, capacitors) and technology distributors.
- Example: Keysight, Teradyne, Amphenol, TE Connectivity, Arrow Electronics, Avnet, LG Display, etc.
3. Semiconductors and Semiconductor Equipment (Code 4530)
Represents the fundamental base of the processing components of modern technology.
- Semiconductors and Semiconductor Equipment (453010): Includes both manufacturers of the necessary materials and equipment (wafers, gases, assembly systems) and producers of the final semiconductors (microprocessors, chips, solar modules and LEDs).
- Example: equipment — ASML, Applied Materials, Lam Research, KLA; semiconductors — Intel, AMD, NVIDIA, Qualcomm, Broadcom, TSMC, Samsung, Micron, Texas Instruments, Analog Devices, etc.
Characteristics
It is a very broad sector, with multiple subsectors that include some of the most prominent companies of the last decade and with high future potential.
These are businesses that tend to be valued differently from those in other sectors; it is advisable to apply appropriate analysis and valuation frameworks so as not to dismiss good opportunities through inappropriate comparison. There are highly complex businesses; it is important to be aware of our limits of understanding before investing.
A large part of the subsectors shows low cyclicality in sales and earnings and is little correlated with the economic cycle.
Innovation is a key factor: the sector evolves quickly and companies that were leaders can fall behind. Examples of possible value traps: IBM, Intel.
Key metrics
The type of competitive advantage (moat) and cyclicality vary widely across subsectors; it is advisable to analyse them separately.
Software and Services (Code 4510)
Cyclicality and growth: Sales with little or no cyclicality in large companies; expected average growth is among the highest in the sector (10–20% per year), driven by digitalisation.
Business model: Asset-light (capital-light) models predominate, based on subscription, with a high share of recurring revenue and stable cash flows. Scalability is key: more users can be served without increasing costs proportionally (high operating leverage). All of this usually translates into very high ROIC.
Margins: Depend on the company’s stage. In early or high-growth stages, a large part of costs goes to R&D and marketing.
| Company stage | Typical margin |
|---|---|
| Young companies | 0–10% |
| Mature companies | 10% to over 20–25% |
Other aspects: Human capital is the critical asset; it is advisable to review turnover and satisfaction. In software, distinguish between vertical software (SSNC, Sage) and horizontal (Microsoft).
Typical competitive advantages: network effect (Meta), switching cost (Microsoft, Salesforce), scale.
Technology Hardware and Equipment (Code 4520)
Cyclicality and growth: Medium cyclicality in sales; estimated growth is low (2–3% per year).
Business model: Similar to industrials: many capital-intensive companies, with less differentiation and non-recurring (one-time) revenue compared to software. Some achieve high ROIC (Apple, Cisco). Patents and intellectual property are essential.
Margins: Around 10% on average, with differences by niche (Apple, for example, ~20%). Margins persistently below average deserve detailed analysis.
Typical competitive advantages: brand (Apple), switching cost (corporate network infrastructure — Cisco, Arista), scale (HP), patents.
Good models with stable sales can support debt, but a trend reversal can be very destructive (historical examples: Motorola, Ericsson, Nokia).
Semiconductors and Equipment (Code 4530)
Cyclicality and growth: High cyclicality; very competitive sector, consolidating and correlated with the economic cycle.
Business model: Very capital-intensive, with continuous investment in manufacturing, marketing and R&D. Products have a short useful life; innovation is essential to avoid obsolescence. Barriers to entry are very high; in the best companies the main moat is usually scale.
Margins: Typical net profit 15–20%, but with high volatility.
TOP company example
- Software and Services: Microsoft
- Technology Hardware and Equipment: Apple
- Semiconductors and Equipment: ASML