Franklin Equity Group’s Jonathan Curtis explains why he thinks businesses will need to invest significantly more in digital technology in the coming years to better understand and service their customers and to reduce costs.

As we begin 2020, some equity investors seem to have concerns about the valuations for technology stocks. Those concerns are understandable considering the information technology (IT) sector has offered the best growth profile in the S&P 500 Index over the past three years, and topped all 10 other equity sectors by a wide margin in 2019.

While there are always industries within the IT sector that are overvalued or undervalued, we do not believe that we are in a 1999–2000 style bubble. Instead, we believe the overall IT sector is appropriately valued for the good growth and quality that it offers. In our view, the IT sector has many excellent established, cash- and earnings-generating businesses. It’s also important to recognize that we are in a period of transition as major new growth drivers emerge in the form of IoT (internet of things), big data and artificial intelligence (AI). Over the next decade, we expect hundreds of billions of “edge devices” to be deployed, an explosion of data generation, and new approaches to computing to sustainably process and create value from all the data that’s available.

That said, we are more optimistic about the long-term prospects for certain companies in the IT sector than others. We are particularly excited about the outlook for those companies enabling the digital transformation (DT) that is taking place across industries.

Digital Transformation and its Subthemes

We remain focused on the highest-quality businesses aligned with the DT theme and its associated sub-themes of AI and machine learning; cloud computing; data science and analytics; IoT; intelligent machines; cybersecurity; software-as-a-service (SaaS); e-commerce; fintech (financial technology); digital advertising; customer insights; next-generation workflow; and software development.