Special Report: The 2017 Tech Investor Outlook

2016 was a lost year for the tech sector as a whole, but not in a uniform manner.

The Nasdaq 100 Tech Sector consistently trailed the S&P 500. Then you have Amazon, which went on a 117% tear on strong earnings.

Of course, those strong earnings were relative to previous results, making it the equivalent of announcing that the automated trash incinerator is no longer being fed C-notes to see if anything good comes out of it.

Then there is that slightly high 184 P/E ratio.

To put that in perspective, if you invested in Ford right after the Modle T was introduced with the same P/E ratio, you'd be about 60% through how long it would take for earnings to catch up to current share prices.

The company and what it's doing is phenomenal, but those buyers. Good Lord.

On the other side you have Apple, which has a low P/E and is a cash-printing machine trumped only by the Fed.

But you can find plenty of coverage on it, and I think we're all better off looking at trends and not companies.

There was one going on in the sector in 2015, and 2016's tech news is primarily going to be variations on the same themes.

Let's dive in and take a look.

Hero Worship

One continuing theme is the laser-like focus on the big names in tech companies.

I said it last year, and I'll say it again: Successful CEOs are still revered as gods, with Elon Musk gazing down on mere mortals like Zeus on Mt. Olympus.

Jeff Bezos (Amazon) is in that category as well, but he is decidedly more low-key. However, Tim Cook (Apple) has become the man of the hour alongside Musk.

This is due in part to Apple's massive presence in mobile technology, but virtually all of the new hype is relating to self-driving cars.

The financial press is incapable of ending an interview with Mr. Cook without extracting a "no comment" about Apple's self-driving car ambitions.

While Musk's Tesla is still the big name in cutting-edge car technologies, the company has a looming fight ahead of it against two of the largest piles of corporate cash in existence — held by Apple and Google.

While the emerging viability of self-driving vehicles has the faint whiff of the unrealized “World of Tomorrow!” 1950s futurism, the problem is only implementation and cost, not the underlying technology.

The market for the next big paradigm in self-transportation is going to take a long time to realize, but the sheer amount of cash that can be thrown at buying the best tech startups for an early advantage cannot be understated.

Some self-driving features are already in mass-marketed cars from Tesla, BMW, and Mercedes.

Everyone else is following suit, and most estimates put about 10 million cars with self-driving features on the road by 2020.

The holy grail will be full automation, though, and that is where startups come in. The incomprehensible flood of data as your computer-with-an-internal-combustion-engine maps surroundings at speed in 3D within a fraction of a second is fundamentally a software problem.

The big companies will try to find the best brains with the best programming in town and then make sure no one else has access to them.

This will spawn a string of lucrative, exclusive deals or outright cash purchases with hefty premiums for investors willing to stomach the risk and try to mentally grapple with who has the best product or just the best B2B marketing.

Apple and Google have the cash advantage, but Tesla has the street cred with consumers and critics in spite of recent recalls.

I wouldn't bet against cash ruling supreme in the 2017 race to dominate, but the prize is still up for grabs.

Upgrading to the 21st Century

Speaking of floods of data and Google, another trend that will rapidly accelerate is a shift away from the Internet version of the Bell phone companies' dominance over connectivity.

Just like in the old telephone days, a handful of companies that explicitly do not compete with each other are eschewing meaningful network investment in favor of price-gouging and resisting change.

Unfortunately for the Comcasts and Time Warners out there, it isn't going too well for them.

Google Fiber is working to expand its coverage to more and more cities. Though critics — especially those working within the media empires that Comcast and Time Warner own — don't think Google is serious about building a national infrastructure, the fact remains that Google is far more serious about it than just about anyone else.

As I said in a recent editorial, Google is willing to make money disrupting the cable company status quo while making them look like the antiquated misers they truly are.

Plus, Google has a vested interest in spurring ever more data to mine and place ads next to. It might as well get real-life demonstrations going and get the ball rolling.

For the cities that have Google Fiber already, Internet access is nearly eight times faster than the nearest competitor for downloads and 52 times faster for uploads, and it is being offered at a lower cost than anything Comcast or Time Warner will accept.

Even municipal governments are getting in on the game due to willful negligence and obstructionism from the ISPs.

Earlier this year, Chattanooga won a lawsuit against Comcast and others when they tried to keep the city from building its own high-speed network.

The companies then took another blow when the FCC overturned state restrictions they supported to prevent the network from expanding beyond city limits.

Companies like Google aren't going to see revenue change in a significant fashion from this, nor will Comcast, Time Warner, and other ISPs that will have to play catch-up to retain subscribers.

Smaller companies in the business of providing "last-mile" services will thrive on contracts as a result.

The Other Cord Cutting

Netflix had a hell of a year, with critically acclaimed programs launching shares over 150% in 2015, but another cord-cutting theme is building up steam.

Wireless charging has been around for a couple years. We're already seeing it in Starbucks and other restaurants, but it is woefully limited. In essence, it is a marketing trick.

You have to leave your device directly on a special pad that is plugged into a socket, making it, and you, immobile.

However, new tech is emerging that makes wireless charging possible at distances up to 15 feet, unlocking the true potential of the technology.

Future Markets Insight estimates wireless charging will see 60% CAGR and $13.8 billion by 2020, and that will just be the start.

Cars will host it for mobile devices. In fact, Chevrolet, Toyota, Nissan, Jeep, and Dodge put it in models in 2014, and it expanded further in 2015 to more makes and models.

Appliances are already being built that incorporate the technology, with Haier Wireless, a subsidiary of Haier Group, one of the world's top-ranked global appliance manufacturers, taking the lead.

This will bring wireless charging into homes with power flowing from fridges, microwaves, and other essential appliances. Ikea is even building it into furniture.

This tech is in the early stages of consolidation and standardization around the most promising companies and formats.

Already, three industry groups have been reduced to two. The A4WP and PMA merged standards bring together some of the biggest electronics companies around, including Intel, Qualcomm, Dell, Samsung, Acer, Delphi Automotive, Duracell, Hewlett Packard, HTC, Fujitsu, Hitachi, Lenovo, Sony, and Toshiba.

The list also includes Starbucks and keeps going for another 100 companies.

The companies that excel in the future will adopt this standard today, take an early lead in incorporating wireless power sources into appliances, and lock down the software and firmware intellectual property that will either result in lucrative licensing fees or de facto sector domination.

Lightning Round

And finally, here are some predictions and points regarding other parts of the broad tech sector.

Private Equity — Companies are still chasing lucrative private placements in lieu of IPOs. That isn't necessarily a bad thing for us, but early valuations are wildly optimistic. We saw this with Etsy and Square this year, amongst others.

Don't take private equity valuations at face value. The money comes from insiders who are betting on big windfalls when IPOs are used to cash out. That means many companies going public are mature or hitting a roadblock. They often don't have any means to keep up growth or generate profits.

Social Media — The focus on monthly active users and growth is important, but it isn't everything. 2016 saw a number of companies punished for not presenting a clear roadmap to profitability.

Facebook has a better platform for ads than Twitter, which is why it has fared better. However, both face issues with how to continue growing their bottom lines.

Expect more downside on any negative numbers and some steep drops if money (revenue/EPS) or user metrics disappoint at the same time.

Drones — They have amazing potential, but there is no clear regulatory path forward. If the FAA can iron out a regulatory system for drones, there is room to run.

The Teal Group, a research firm, believes spending on drones will double over the next 10 years, totaling more than $91 billion in the process. I think that is overly ambitious.

Regardless, AeroVironment, Inc. is about the only company that presents a pure play, but it has very limited commercial exposure. It primarily sells to the Department of Defense.

GoPro is working on its own drones, which makes sense considering people are strapping the company's cameras to drones. However, the company is in a bad sales slump. This could be a value investor play, but it just as easily could become value trap. Shares are down 70% this year.

Virtual Reality — VR is amazing. I will give it that, but it has a long way to go. Google Cardboard is a good example of how it doesn't have to involve a high-end PC and giant headsets, but in the end, it is pure entertainment.

Having said that, entertainment stocks can soar in short order on the release of a hot new product or all-around strong sales. Just look at Activision Blizzard Inc. as an example, with its 82% rise in share prices this year.

The company that can make a VR headset or product and couple it with good software at launch, all with a decent price point, will become the next Nintendo circa 1985.

For now, only very speculative bets are possible, and the only public companies are already massive, like Facebook, Google, Apple, and Sony.

Biotech's Future

At the crossroads of Big Pharma and the tech sector stand a handful of companies that are going to change how medicine and treatments are delivered in coming years.

New devices, coupled with new techniques such as CRISPR, which allows custom DNA modification and creation at previously unimagined scale and low prices, are being fast-tracked for mass markets.

Vaccinations that use specific DNA coding, without the risk of infection from weakened pathogens, with easier to ship and store components, and with needless, reusable delivery methods, are in the final phases of FDA approval.

Previously unstoppable diseases, such as Ebola, Zika, yellow fever, and dengue fever, are all prime targets. Even many cancer treatments are being developed to turn our own immune systems against malignant cells without radiation or poisonous chemicals.

The Outsider Club will continue to cover the latest and greatest in tech when it provides a clear path for investor profits. Stay tuned to our free newsletter, and we'll make sure you have all the information you need.

Take Care,

Adam English

Adam English

follow basic @AdamEnglishOC on Twitter

Adam's editorial talents and analysis drew the attention of senior editors at Outsider Club, which he joined in mid-2012. While he has acquired years of hands-on experience in the editorial room by working side by side with ex-brokers, options floor traders, and financial advisors, he is acutely aware of the challenges faced by retail investors after starting at the ground floor in the financial publishing field. For more on Adam, check out his editor's page

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