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Shining a light on Silicon Valley: three tech themes to follow

Shining a light on Silicon Valley: three tech themes to follow

The near-term future of technology will be driven by increased data capacity and the sustainable boom of online and mobile gamers, Fidelity’s Hyunho Sohn has said.

Sohn made the comments in an investment update for the €344 million Fidelity Funds – Global Technology fund.

Having visited 20 companies in the world’s tech innovation capital of Silicon Valley, Sohn set out the three key themes he expects to propel returns in the sector.

Let’s take a closer look at where the sector specialist will be allocating his capital.

Data centre build

Sohn said the growth of large-scale data centres, which are used to house computer systems and servers, has raised some concerns of a repeat of the dotcom bubble. However, he said this is a sustainable trend.

‘Global traffic is growing 20% for the foreseeable future and 70% of that traffic is coming from the consumer. These are consumers using more applications or seeking higher quality video content for streaming, as well as adoption of mobile internet,’ he said.

Sohn said leaders in the field, such as Intel and Amazon, had projected long-term growth but were planning more short-term. For example, Amazon is building capacity to meet short-term demand.

‘They are not as irrational as headline numbers suggest, Amazon said they are increasing website capacity to meet demand for the next few months, not the next few years. Microsoft, a leader in cloud service provider for enterprise, doesn’t believe they are building over-capacity.’

Stock examples

Sohn named Mellanox as a dominant player in InfiniBand and high-speed Ethernet. Altera, the firm’s semiconductor device is increasingly adopted in hyper-scale centres and next generation networking and storage systems.

Gaming software

While dismissed in some quarters as a fad, Sohn said the growth of the industry is startling and, at current projections, will grow from a €53.9 billion industry to €82.1 billion by 2017.

‘People used to play games on gaming consoles at home with family and friends or in massive-multiplayer games for the PC,’ Sohn said.

‘But now, with phenomenal improvements in graphics processing power and faster internet speed for mobiles more people play in multiple devices connected online.’

Sohn was particularly bullish on software developers who have made the leap from console-based product cycles to direct distribution to the online gaming market.

‘This not only reduces distribution costs and improves margins but also improves customer relationships. There is a change in secular drivers behind fundamentals of gaming software companies, while many investors still think video game stocks they are still console-cycle based.’

Stock example

Games developer Activision was named by Sohn as a firm which owns and develops world-class games in various genres. This is while having significant growth opportunities in the Chinese market.

Enterprise IT

The ability of companies to improve their IT efficiency will become increasingly competitive, Sohn said, but he believes the current market leaders have the resources and willingness to stay ahead of the pack.

‘There are concerns in the market that new groups funded by large companies are well-suited to destroying existing companies in the near future. People prematurely conclude that availability of free open-source software and cheap-and-powerful commodity silicon means any company can easily build robot systems, this is far from reality.’

Sohn said networking equipment group Juniper Networks had told him the engineering effort required will discount many new players. This is as well as unwillingness among consumers to break away from traditionally strong companies.

‘Customers are not fully ready to take a radical approach, which leads me to believe incumbents such as Cisco will maintain leadership in next generation technology.’

Stock example

Sohn said he will continue to back Cisco, which has a strong leadership in enterprise and networking, as well as telecom infrastructure. He said it is also positioned to leverage global install base, sales force, channels and service capabilities.

The Fidelity Funds - Global Technology fund returned 66.5% in US dollar terms over the three years to the end of November 2014. This is while its Citywire benchmark, the FTSE AW/Technology TR, rose 74% over the same period.

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