Overall, we view the tech sector as overvalued today at a market-cap-weighted price/fair value of 1.05 as of the end of February versus 1.08 at the end of November and 1.09 at the end of August.

The US-based technology index, the Nasdaq, has risen about 6 per cent from mid-December to mid-March and is up about 6 per cent year to date in 2018.

We’ve seen some fits and starts among large-cap tech leaders. Apple reported predictably strong fiscal first-quarter results as the company essentially sold the same number of phones in the December holiday season as in years past, but at notably higher prices, driven by demand for the high-end iPhone X.

However, follow-up demand for the X during the Chinese New Year and following the holiday season has reportedly been tepid, which is casting a minor shadow on many of Apple’s suppliers, in our view.

As we look across the semiconductor supply chain, we still see tremendous demand in the industrial and automotive sectors, as rising electronics content per device remains a favourable secular trend. Whether it is increased electronics in cars (via infotainment, safety systems and/or electric vehicles) or “smart” devices broadly grouped into the Internet of Things, chipmakers continue to profit from higher content per gadget.

Enterprise software and IT Services are still interesting growth sectors to us, and we still see a handful of undervalued names in these spaces, including Microsoft, Salesforce.com CRM , and Guidewire Software.

Nonetheless, we still believe that valuations across tech are painting overly rosy scenarios in new and emerging technologies around artificial intelligence, for example, where Nvidia and AMD still appear significantly overvalued to us.

In our view, the single most important trend in technology remains the ongoing shift toward cloud computing, which we think is having ramifications on dozens of stocks across our coverage. In short, both startups and enterprises, in efforts to reduce the high fixed costs associated with running on-premises IT hardware and software, are shifting more and more workloads to infrastructure-as-a-service vendors, such as Amazon Web Services, Microsoft Azure, and Google. In turn, IaaS vendors, along with software-as-a-service vendors, are seeing tremendous growth while legacy IT vendors face ongoing headwinds.

In SaaS, Adobe Systems and Microsoft have been especially adept at transitioning to the SaaS model, as selling subscription software, rather than charging for up-front licenses, have expanded their customer bases. Oracle ORCL , for one, has been relatively slower to pivot, in our view, albeit with some signs of optimism at times.

Another ongoing trend within technology remains mergers and acquisitions. Relatively smaller deals have been made in the semiconductor space, however. We still anticipate consolidation in the semiconductor industry in particular, as larger players seek scale and diversification while still being able to strip out excess costs and drive operating leverage.

Meanwhile, the enterprise software space is perpetually on the lookout for M&A, especially among industry leaders like Oracle, Salesforce.com--which just bought Mulesoft--and even Cisco Systems as it strives to beef up its software capabilities.

Finally, changes in US tax laws are likely to be a huge boost to technology firms, as global tech leaders are able to repatriate overseas cash into the US, which can be used for dividends, share repurchases, and potentially even more M&A.

Apple has the world’s largest cash cushion, and we were stunned by the firm’s proclamation that it intends to run the business at net cash-neutral, meaning that the firm has US$163 billion of cash to either invest or return to shareholders. Cisco also announced a massive US$67 billion repatriation of cash back into the U.S. and similarly authorized a US$25 billion share-repurchase plan.

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Brian Colello, CPA, is a senior equity analyst for Morningstar, based in the US.

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