Our Forecasts for Growth in the Technology Sector

We expect total revenue to grow at a 7.5% compound annual rate over the next five years for the technology firms that we cover. Here are some key insights about where we expect to see growth in the technology sector. Make sure to download the full report for more detailed analysis of each industry including stocks that we think deserve a look.

Smartphones and Mobile Devices

We believe growth in the smartphone market will add $49 billion to Apple’s (AAPL) top line by 2014 and increase Research in Motion’s (RIMM) revenue by $18 billion over the next five years. Hardware is the largest industry by revenue in our coverage universe, and we expect the industry to grow at a brisk 7% annual rate over the next five years.

Software as a Service (SaaS)

We expect SaaS companies to be among the fastest growers in our coverage. Low up-front costs and limited need for IT support personnel will continue to drive customer demand for SaaS solutions provided by vendors such as Salesforce.com (CRM), RightNow (RNOW), and NetSuite (N). Research firm Gartner estimates that, even in the midst of the economic recession, overall SaaS sales grew from $6.4 billion in 2008 to $7.5 billion in 2009. This 17% increase in sales came at a time when traditional on-premise software companies like Oracle (ORCL) and SAP (SAP) experienced double-digit declines in sales of new licenses. We expect SaaS vendors to continue double-digit growth for the next five years as SaaS technologies mature and customers get increasingly comfortable with using software managed and delivered by third parties.

Internet and wireless data traffic growth

Internet traffic continues to grow at a rapid pace, and this will drive growth across the semiconductor industry, especially at firms that specialize in advanced network processors, such as Cavium (CAVM) and NetLogic (NETL). On the wireless side, the global migration to 3G/4G networks coupled with the rapid adoption of smartphones and other mobile Internet devices should continue to benefit Analog Devices (ADI), Altera (ALTR), and Xilinx (XLNX) who produce semiconductors which serve as key components in wireless base stations and other pieces of equipment used in wireless towers to transmit and receive data.

Storage

As corporations and consumers around globe capture, store, archive, and back-up growing quantities of data, we see high-growth opportunities in the data storage. Three small storage companies – Isilon (ISLN), 3PAR (PAR), and Compellent (CML) – top our growth chart for the hardware industry, each with above 25% CAGR over the next five years. The storage giants, EMC (EMC) and NetAPP (NTAP), are also expected to grow at 12.4% and 14.7% CAGR, respectively.

Semiconductor Equipment

The semiconductor equipment industry suffered one of the worst downturns in its history in 2008-2009 but we believe brighter days are ahead. For the 11 semi equipment names in our coverage, we forecast 18.1% CAGR over the next five years, the highest of any of the industries in our technology coverage universe. The growth of smartphones, mobile Internet devices, and solid-state drives is pressuring flash memory production capacity, and we believe another investment cycle lies ahead. Some of our favorite names in semi equipment are Applied Materials (AMAT) (10.3% CAGR) and KLA-Tencor (KLAC) (14.7% CAGR).

For a complete look at our sector and industry forecasts as well some of our stock picks for each industry, click here to download the full report.