Technology Sector Growth Appears Upbeat

J.P. Scandalios
Vice President, Portfolio Manager
Franklin Global Advisers

The global financial crisis that started in 2008 impacted many industries, and the technology sector was no exception. Technology-related durable goods orders declined approximately 20% from June 2008 until a bottom was reached in January 2009.¹ Likewise, technology stocks appear to have bottomed in late 2008 to early 2009. Year-to-date, many technology stocks have performed quite well, outperforming the S&P 500 Index.

We are, however, starting to see a return to growth with the June quarterly earnings season behind us. As of June 2009, out of 100 securities in the ML Technology 100 Index, 68% outperformed their estimates.² We believe that later this year and into 2010, conventional growth may resume in the technology sector, and this belief guides our fairly optimistic outlook.

The four main purchasers of technology-governments (federal, state and local), carriers (wireline and wireless), consumers/individuals, and corporate enterprises-have growth drivers that, even with a flat to slightly increasing global gross domestic product (GDP) environment, could potentially trigger more spending on technology. In fact, just recently the International Monetary Fund (IMF) raised its global GDP forecast, which bodes well for the growth potential of the technology sector heading into 2010.

Several interesting trends are currently taking place in the technology arena that may serve to stimulate the sector. These include the U.S. government’s broadband stimulus package; China’s wireless carriers' multiple network buildout; and Microsoft's launch of the new Windows 7 operating system. There has also been much talk about the growth in smart phones and netbooks.

Looking further into the future, we are seeing some very powerful secular trends, like touchscreen functionality proliferating in all sorts of electronic devices. In the enterprise area, we believe cloud computing, server storage and desktop virtualization are likely to experience an increase in demand over the next few years.

Outside of traditional tech, we are seeing other industries, like medical devices, starting to lead innovation. For example, robotic surgery is becoming a rapidly growing area of interest, so there is a developing opportunity in the health care sector. A company that we find very interesting in this area is Intuitive Surgical, a maker of robotic surgery devices.

We see tremendous growth potential in the company for various reasons. First, its technology is not yet widely adopted; there are significant barriers to entry for competitors; the company is currently the only supplier in the market; and, lastly, all robotic surgery devices would require FDA approval, which can be a time-consuming and difficult process for possible competitors. The adoption of Intuitive's Da Vinci Robot has been very rapid, with 1,200 Da Vinci systems currently in place, primarily in the United States, and over 200,000 procedures projected to be performed in 2009 using this robotic device.

Looking forward, we expect there is a market potential of at least double the number of surgical robots to be deployed and over a million procedures performed annually, so we believe there is much growth potential for Intuitive Surgical.

1. Source: U.S. Department of Commerce Advance Report on Durable Goods, July 2008 and February 2009 releases
2. Source: Bloomberg, June 2009

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