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January 21, 2020

Investing in Technology



The technology sector encompasses anything from well-known large companies to minor and major players that conduct their business mainly out of sight, as well as emerging companies of various sizes.

In a wider sense, this segment includes stocks involving the research, creation and distribution of technology-based products and services.

During the years leading up to the dot-com bubble in the late 1990s and 2000-2001, investments in technology were fraught with rampant speculation and high risk companies that failed to turn a profit.



Starting with 1993, with the introduction of the Mosaic web browser, internet usage increased due to developments in connectivity and computer education which effectively reduced the so called “digital divide” (the uneven distribution of access).

This marked the transition to an economy based on information technology called “The Information Age” and many new companies were established.

In 1996, President Bill Clinton signed the Telecommunication Act, a law aiming to free up the communications industry market so that anyone could enter and compete. People expected the outcome to be a multitude of new technologies that they could profit from.

Anything with a “.com” in its name was bet with enthusiasm from investors to the extent that they were willing to overlook traditional metrics like price-earnings ratio.

Many quit their jobs and dedicated themselves to day-trading fulltime.

The companies, equally enthusiastic, invested heavily in advertising and promotions, hoping to build market share as quickly as possible but, as a consequence suffered net operating losses.

The “get large or get lost” mantra led them to throw money on lavish dot.com parties, luxury vacation for their employees and fancy business facilities.

In 1997, unprecedented amount of capital poured into the Nasdaq Stock Market and by 1999, 39% of all venture capital investments were targeting internet companies.

Mass hysteria over The Year 2000 Problem followed, there were concerns over how the change from 1999 to 2000 would affect computer systems and possibly give rise to broader social or economic problems.

When January 1 arrived, there were only minor glitches, all was well.

The eventual popping of the dotcom bubble was in no small measure triggered by the decision of the Federal Reserve and Fed Chairman Alan Greenspan.

He may have cautioned against “irrational exuberance” in his 1996 televised speech, but he waited until the spring of 2000 to tighten monetary policy. By this time banks and brokerages had invested the excess liquidity that the Fed created prior to “The Year 2000 Problem” into internet stocks.

After he had poured gasoline on the fire, he had to burst the bubble, leaving many investors with huge losses and companies in bankruptcy. Amazon, eBay (News - Alert) and Priceline are among the famous survivors.

Fast forward to today

Nowadays, however, every sector of our increasingly globalized economy is reliant on technology for improving quality, productivity and profit margins.

The tech sector may still be less predictable than that of utilities or consumer goods, but throughout 2019 its been sitting pretty as a top-performer.

When it comes to investing, it can be hard to get a clear picture of the value tech stocks, as the products and sources of revenue can be more complicated than that of a company selling consumer goods we’re already familiar with.

There are metrics such as gross profit margin or operational leverage that are particularly important when analyzing the likelihood of making profit out of buying tech shares, but the fundamentals still apply:

  • The company has to provide a competitive advantage such as brand value or proprietary technology
  • A good balance sheet with manageable debt levels
  • Reasonable valuation because you can’t make profit if the company is selling their stock at unreasonable prices, they have nowhere to go but down. 

You can use an online CAGR calculator as a first step in predicting the average rate of growth or a potential investment.

Dividing it into the main company profiles can aid you in gaining a better understanding of this market:

1. Software companies

These companies use the SaaS (News - Alert) or software-as-a-service business model. Back in the day, software companies were sold for a one-time fee but since they would have to make content upgrades to keep it competitive, a subscription access strategy made more sense and also yields more revenue.

2. Hardware companies

Hardware may not be getting the same amount of respect as in prior decades, but it remains vital to the technology world. The internet itself works only if it can rely on a massive infrastructure of equipment. Although code can replace an increasing number of hardware functions, it’s still just code and needs to run on something. 

Semiconductors are the most popular right now, since so many other types of products and services rely upon them, but this profile includes any component or finished technology product from computer peripherals and data storage devices to smartphones and consumer electronics. 

3. Telecommunication companies

They enable communication through satellite, television broadcasting, radio or internet. Companies such as Vodafone, Verizon and AT&T.

4. Internet information companies

Companies such as Yelp (News - Alert) or eBay make a return out of providing a platform for internet users to connect with businesses, hosting an online marketplace or content.

When deciding whether or not you want to invest in one such company, you’d be well advised to look not only at valuation, but also market potential. Unfortunately, there’s no clear cut method of doing so but the most relevant metrics are forward earnings projections, earning growth rate and P/E ratio (price-to earnings ratio) and PEG ratio (price-to-earnings-growth ratio). If it’s a growing company, you can get an idea of its financial health by looking at the free cash flow and debt.

It may all sound confusing and intimidating right now but Rome wasn’t built in a day and neither was Apple (News - Alert). Even investors like Warren Buffet don’t claim to be able to predict this market, but as you can see through a simple Google search there’s no shortage of people racking up a return, as long as you’re willing to invest, not only money, but patience and a willingness to learn.



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