Bank of America says these 2 areas in technology are still undervalued and have room to run in 2021

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Traders work on the floor of the New York Stock Exchange shortly after the opening bell in New York, U.S., March 17, 2020.

  • After a year dominated by mega-cap tech stocks, Bank of America says the technology sector has more room to run in 2021. 
  • But next year’s trade will be about enterprise technology stocks like software, as well as areas of tech sensitive to the economic recovery like semiconductors, according to Savita Subramanian, the bank’s head of US equity and quantitative strategy. 
  • “The world is long FAANG,” said Subramanian, but software and semiconductors aren’t at as much of a crowding risk. 
  • “Technology to us is secular growth with a cyclical price tag,” the strategist told a Tuesday webinar. 
  • Visit Business Insider’s homepage for more stories.

Investors have piled into the FAANG trade, but that doesn’t mean there aren’t other opportunities in tech, according to Bank of America. The bank recently said it has an overweight rating for technology in 2021, and that the sector will benefit from an economic recovery next year.

“Technology to us is secular growth with a cyclical price tag,” said Savita Subramanian, head of US equity and quantitative strategy, in a Tuesday webinar.

She added that the sector is “relatively unloved” but clarified, “this is more enterprise tech rather than FAANG tech.”

Semiconductors and software are two areas within the tech sector that are poised to gain next year, said Subramanian. Semiconductors are GDP-sensitive and will perform well during the 2021 economic recovery. She prefers semis to software, but added that software is still attractive because it’s not as crowded as other corners of the sector. In a recent note, her team highlighted that software investments accelerated in 2020, a trend that is likely to continue for several years. 

Subramanian’s team also noted that investor crowding is a risk to the technology sector more broadly. US tech and growth stocks are considered the “most crowded trade” according to BofA’s global fund manager survey published mid-November. 

Read more: Buy these 19 small-cap stocks that hedge funds have invested the most dollars in as smaller companies head for their strongest monthly outperformance ever, RBC says

“…The leadership from that very narrow cohort of stocks was driven by everybody buying.” Subramanian told listeners on the webinar. “It was driven by individual investors, institutional investors, hedge fund investors…the world is long FAANG.” 

But software and semiconductors don’t have as much as a crowding risk as the  “communication service tech franchise” part of the market is, she added. 

“If you look at the areas of the market that are very crowded today within tech, it’s primarily TMT and media and interactive entertainment, interactive media and services, which resides within the communications services sector rather than the information technology sector,” said Subramanian.

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