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This Segment of Tech Stocks Will Outpace the Rest Over the Next 4 Years

Technology stocks have been the must-own sector for more than a couple of decades now. That's not apt to change in the foreseeable future either.

If you think one technology stock is as good as another though, think again. They can be dramatically different when it comes to growth prospects, and enterprise software companies like Microsoft (NASDAQ: MSFT) and ServiceNow (NYSE: NOW) are poised to outgrow other tech names for the foreseeable future.

That's the call from technology market research outfit Gartner (NYSE: IT) anyway, which recently posted its long-term IT spending outlook. The organization believes global tech spending will improve by 9% year over year in 2021, led by more than a 13% swell in software outlays. Unlike other technology arenas, however, enterprise software sales will remain abnormally brisk through 2025.

Investors should make a point of holding exposure to this sliver of the tech sector during this time.

Image source: Getty Images.

Better than the rest

All of the technology sector's key industries should benefit from IT spending growth this year, for the record, and this widespread progress is expected to persist through 2022. The rising tide isn't expected to lift all boats equally, however.

The graphic below puts things in perspective. Services of all sorts will see steady growth through 2025, according to Gartner, and data center systems and device manufacturers are apt to fare even better. The standout area, however, is clearly enterprise software. Gartner estimates software spending will grow at a double-digit percentage pace every year through 2025. In fact, it will be the technology sector's only segment to achieve double-digit growth in any year except for this year's expected 13.9% growth in spending on devices, which is exaggerated this year due to last year's decline.

Data source: Gartner Inc. Chart by author.

And in case you're wondering, infrastructure software spending is projected to lead the way, albeit just barely. Spending on enterprise-level apps, or computer programs, should see almost as much growth, suggesting software spending plans are well balanced.

Best of the best

The stage may be set for growth, but which software stocks will make for the most productive picks?

One of the most obvious beneficiaries of this projected growth is, of course, Microsoft. It's hardly a pure play, with offerings ranging from operating systems to video gaming to personal productivity to cloud computing. Its Intelligent Cloud division is now the company's single-biggest operating unit though, accounting for $15.1 billion of last quarter's revenue of $41.7 billion. Its cloud-management interface Azure saw a 46% year-over-year improvement in revenue, as enterprises embrace highly capable off-the-shelf solutions. Market researcher Canalys estimates Microsoft leveraged Azure to end Q1 with 19% of the world's cloud infrastructure spending market share, up from 17% a year ago and 15% two years ago.

Image source: Getty Images.

Enterprise software isn't limited to cloud infrastructure solutions though. Businesses are looking for all sorts of robust tools, like the ones offered by Adobe (NASDAQ: ADBE).

Many consumers may not realize they've already bought Adobe's offerings. The company's Experience Manager platform allows organizations to manage websites and collect consumer names and data using enrollment forms. Meanwhile, Adobe's Creative Cloud suite allows users to create great digital graphics with, among other things, an online version of Photoshop. Both are sold on a subscription basis as well, facilitating stable, predictable, recurring revenue.

Finally, put a cybersecurity name like Palo Alto Networks (NYSE: PANW) on your watchlist too, if it's not already in your portfolio. While it's clearly more of a maintenance-type solution than a business-building one, it's no less necessary. Gartner estimates that worldwide spending on security and risk management technologies will swell by 12.4% to reach $150 billion this year, loosely mirroring Canalys' outlook of 10% market growth in 2021.

Bear in mind there's a bigger picture

These aren't the only solid software prospects to consider, of course. There's a whole universe of these stocks to choose from, any of which would be fine picks. A broad-based basket like the iShares Expanded Tech-Software Sector ETF (NYSEMKT: IGV) is in play as well. Its two biggest holdings, in fact, are the aforementioned Adobe and Microsoft, although the fund also offers its owners a stake in dozens of software names that may be too burdensome to own individually. In fact, that may be the best path for most investors to follow, plugging them into a fairly narrowly based but theme-based trend that's bigger than any one particular company.

Regardless of how you tap into the trend that Gartner sees brewing, the one thing you absolutely don't want to do is miss out on it by underexposing yourself to software by overexposing your portfolio to other technology stocks.

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Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. James Brumley has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Microsoft, Palo Alto Networks, and ServiceNow, Inc. The Motley Fool recommends Adobe Inc. and Gartner. The Motley Fool has a disclosure policy.


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