Even people who barely pay attention to the stock market know that technology has been a winning trade for years. The tech sector was up nearly 40% in 2017 and has gained 19% a year on average for the past five years versus the S&P 500, which gained 20% last year and 13% on average for the last five.
The performance of a handful of companies tied to the growth of digital communications and commerce has been even more spectacular. These so-called FAANGs (an acronym drawn from the first letter of the names of some tech giants) dominate their respective industries—social media, e-commerce, mobile, search and video streaming—while also benefitting from powerful macro tailwinds that favor consumer-facing businesses.
So how do you find the next tech leaders?
Morgan Stanley thinks the next FAANGs will be quite different from the current group. The bank expects them to benefit from some of the same trends as their forerunners, but that their products and services will serve businesses, not consumers. Furthermore, the new leaders will likely be those companies that reduce the cost of production rather than the cost of consumption. They may do it through industrial automation, robotics, artificial intelligence or blockchain technology.