Following a strong 2023, the tech industry continued to perform well in the first quarter of 2024. Semiconductor companies continue to be under pressure, but software and services generally reported strong performance. We still believe fundamentals are less important than investors' expectations regarding the Federal Reserve's interest rate cuts this year. The technology sector was the best performing sector both in 2023 and in the past quarter. There are no consistent performance differences across market capitalization tranches, making it increasingly difficult to identify themes. We remain confident in our long-term tailwinds, including cloud computing, artificial intelligence, and secular growth in demand for semiconductors. However, as these stocks have performed well since the start of 2023, clear buying opportunities have diminished.

Technology continues to perform well through March 2024
Source: Morningstar. Data as of March 22, 2024.

The most important force we're seeing across technology right now is generative AI. Software companies are developing and incorporating next-generation AI capabilities into their solutions, cloud providers are introducing new services to increase capacity, and semiconductor companies (particularly his Nvidia NVDA) are developing AI and data center chip applications. is facing a surge in demand.

Most technology stocks appear to be slightly overvalued
Source: Morningstar. Data as of March 22, 2024.

The Morningstar US Technology Index is up 54% over the past 12 months. In comparison, the US stock market is up 34.6%. Over the past quarter, the U.S. stock market rose 9.7%, and the tech market rose 14.2%. The median value of U.S. technology stocks is slightly overvalued, with little margin of safety. We believe semis and hardware are overvalued and software is a good value.

Software demand is expected to recover gradually
Source: Morningstar, Gartner. Data as of March 2024.

Software revenue is expected to increase more than 10% annually through 2027, including approximately 14% in 2024, due to existing customers such as additional seats and new modules, new vendors and new business formation, and overall pricing. I'm predicting it. We also expect software margins to expand by 25 to 150 basis points annually over the next five years, as management has focused on profitability over the past year amid leverage across all expense lines and slower growth. Masu.

Software free cash flow margin should continue to expand
Source: Morningstar. Data as of March 2024.

Top Picks in Technology


Adobe ADBE has come to dominate content creation software with its iconic Photoshop and Illustrator solutions. Both of these solutions are part of the broader Creative Cloud, which is clearly the leading software for creative professionals. Adobe Express is expanding its funnel to new customers, which we believe bodes well for growth in the coming years. We also see Firefly-generated AI models as a key growth driver. Overall, there is plenty of momentum in product innovation, customer interest, and revenue generation, and the company's valuation remains attractive, even after the March earnings release provided unnecessarily confusing guidance. We believe that this is the case.

Cognizant Technology Solutions

We believe Cognizant CTSH is well-positioned to continue to grow its reputation beyond being a back-office outsourcer to higher-value technology services such as digital engineering and AI solutions and digital transformation consulting. In our view, smaller IT providers offering digital transformation services will be squeezed out by consolidating their accounts with larger vendors like Cognizant. We estimate a five-year average annual growth rate of earnings of 8%, with an acceleration of 5% over the past five years.


We like the long-term tailwinds in the automotive end market, as ST STM can benefit from increased chip content per vehicle, especially in electric vehicles. The company has also achieved significant gross profit margin expansion in recent years and expects to maintain this margin over the long term. We are encouraged by ST's recent prediction of mid-single-digit growth in auto sales in 2024, especially if his EV market performance is slightly worse than feared. Overall, we believe short-term risks are priced into current market prices, and we believe there are potential gains for investors looking forward to a widespread semi-annual downturn.

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