IT sector valuations on Wall Street are now reasonable; remain optimistic despite volatility

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Some names in the IT industry have seen a correction in recent weeks, which could have been due to investors pulling out of last year’s tech winners. (Photo: REUTERS)

Valuations in the IT sector on Wall Street now appear to be declining to reasonable levels, after remaining elevated in early 2021, according to Jonathan Curtis Research Analyst, Portfolio Manager, Franklin Equity Group. In a recent blog post, Jonathan Curtis said sector valuations now look more reasonable in relative terms after the recent period of selling pressure. “We also believe that the sector should probably benefit from a valuation premium over the wider market given the improvement in the quality of businesses in the space – an increasing number of recurring revenue streams, Strong balance sheets and strong overall EBITDA margins – and their growth characteristics, ”he added.

Digital transformation to help

Since the start of the year, the S&P 500 IT Index has climbed 8%. In the first half of May, the index fell sharply. Jonathan Curtis believes that the information technology sector offers a solid exposure to solid secular opportunities related to the topic of digital transformation (DT). He added that the DT theme was only just beginning and could also prove to be a strong cyclical winner with high leverage on post-pandemic reopening and infrastructure investment activity.

The DT theme, Curtis added, is to use software and data to better understand customers, business processes and technology to radically transform how businesses operate. “We believe DT represents a multi-billion dollar opportunity that is still in its infancy. While the pandemic has shed light on our thesis, we do not believe this opportunity is over, ”he said. IT companies around the world have witnessed a strong demand for digitization throughout the pandemic. Jonathan Curtis said this trend will continue as companies move forward or evolve in their digital journey.

Technology is now an area of ​​both secular and cyclical growth

Some names in the IT industry have seen a correction in recent weeks, which may have been led by investors who turned away from last year’s tech winners and who stand to benefit from increased infrastructure spending, according to Jonathan Curtis . He adds that technology has now assumed the role of both secular and cyclical growth area. “Secular growth supported by the long-term trend of digital transformation, but on the cyclical side, businesses and consumers spend more on technology when their prospects improve. “

According to Jonathan Curtis, application software, semiconductor, and system software are areas of the market that contain many quality companies that have secular growth opportunities related to digital transformation.

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