5 Investment Themes in Technology, Media and Telecom

The technology, media and telecom sector encompasses a wide range of companies that are dealing with different opportunities and challenges in a new digital reality. Some are regrouping after tremendous pandemic-driven growth. Others are supporting transformation in global markets. Still others are capitalizing on their clients’ need for efficiency. In this roundup of the latest trends in the sector, Morgan Stanley Research analysts offer insights into the latest innovations and disruptions in the sector against the backdrop of global economic uncertainty and market volatility.

Valuations for companies in the education technology space have settled down, following a pattern similar to other companies offering software solutions that saw a marked spike from pandemic-driven demand. But Morgan Stanley analysts see future potential for growth. “Though fragmented and challenging to define, the industry is still in its infancy,” says Miriam Josiah, head of Morgan Stanley Research’s European Internet Services. “Greater digitalization of education, global teacher shortages, rising school costs and the need to reskill and upskill workers all support an impressive growth trajectory.” This, she adds, should offset any drag from challenging macroeconomics that could affect national education budgets and consumer spending. Though the industry growth predicted for future years has already been accelerated by about two years because of Covid-19, the global EdTech market, currently valued at $300 billion, is still expected to grow at an annual rate of 16% to reach $400 billion by 2025, based on HolonIQ data, with K-12 education leading demand.  

Global spending on education is about $6.5 trillion and expected to rise to $7.5 trillion by 2025, with K-12 education the largest and fastest-growing segment. 

While the need for lower-cost data management has spurred significant growth of cloud computing, a recent Morgan Stanley survey of chief information officers found that an overwhelming majority of companies are relying on a mix of physical, on-premise, co-located and remote data-storage solutions. But maintaining multiple systems  can be cumbersome. “This has created a substantial opportunity for legacy infrastructure vendors that can offer services and products to create a more seamless environment between physical and cloud environments,” says Meta Marshall, a Morgan Stanley Research equity analyst covering telecom & networking equipment and communication software. “As a result, we see the opportunity for hybrid IT growing 57% through 2026 to $18 billion.”

Telecom companies have outperformed global equities by more than 10% year to date, leading many investors to think the sector’s status as a defensive play against macroeconomic challenges has peaked.

“Telecoms are trading about 30% cheaper than other defensive stocks, which is a 15-year low,” says Emmet Kelly, head of Telecom Research. “This leads us to think the outperformance is set to continue.”

While inflation remains a focus, analysts expect that telecom companies’ declining need for spending on infrastructure will help improve financial flexibility and that accelerating cash flows will feed buybacks and shareholder dividends. 

Peaking capital expenditures for telecoms over the next few years should lead to attractive shareholder returns compared with other defensive sectors. 

Some of the largest streaming TV companies have diversified their product offerings to include ad-supported tiers, potentially creating one of the most significant sources of premium video ad impressions since the rise of streaming video content in the last decade. This shift should accelerate the migration of advertising dollars from traditional linear TV, which still commands the majority of brand-marketing budgets. “As increased data from viewers allows for premium ad targeting and performance-driven ads similar to internet advertising, marketers will earn improving returns for ad spending,” says Ben Swinburne, head of U.S. Media Research. “While we expect all existing video advertising players will face new competition in the coming years, we see the U.S. connected TV ad market growing between 15% to 20% annually through 2026.” 

India’s vision of economic prosperity has for years centered on leveraging technology as a growth engine, and Morgan Stanley analysts’ prediction that the country will surpass Japan and Germany to become the world’s third-largest economy by 2027 is in large part underpinned by the advancement of this strategy.

India started laying the foundation for a more digital economy more than a decade ago. Now, IndiaStack, a decentralized public utility offering a low-cost comprehensive digital identity, payment and data-management system, could transform the way the country of more than 1 billion people spends, borrows and accesses healthcare.

Increased digitalization is also expected to bring new momentum to the idea of India as the back office to the world. An increase in outsourced jobs and availability of credit are among the factors that will help India’s gross domestic product to more than double to $7.5 trillion by 2031.