TMCnet Feature
January 07, 2021

Measuring the value of an emerging technology - is it worth investing in?

It's no secret to anyone that Big Tech companies have been in Wall Street's spotlight for the past decade. Not even the COVID-19 pandemic managed to significantly harm the stock prices for massive companies such as Facebook, Amazon, Apple (News - Alert), or Netflix. If anything, the pandemic actually helped some of them increase their net worth.

Despite these companies managing to take over almost the entire market, experts believe investors are growing tired of the unprecedented level of concentration the market seems to have reached. This is why they are starting to shift their focus towards smaller, innovative companies that are growing at a fast pace. Innovations in fields such as virtual reality, cybersecurity, and health tech have the potential to become the next leaders of the tech sector and bring some dynamic back into the market.

However, the issue with emerging technologies is that there's often too little data to determine the success or failure of these companies. There is a constant push for digitalization that results in new tech startups appearing like mushrooms after a rain, but not all of these companies are bound to become the next tech titans.

But how can one determine if an emerging technology is worth investing in or not? For starters, they need to have a deep understating of both technology and investment, to be able to make accurate market predictions and measure risks.

Investing in tech – a general overview

To put it simply, the technology investment sector includes companies involved in the research, development, and distribution of tech-based products and services. This includes hardware, software and websites alike.

One key aspect to remember about investing in tech is that returns can greatly vary, sometimes more than in other industries. A simple look at the past years is enough to understand what we mean. The tech sector grew by 50.94% in 2009, almost double the average of all sectors. However, in 2012 it only registered a 15.46% growth, nearly 5% under the all sectors average.

The tech sector includes a variety of areas for investment. Some are well-known technologies such as smartphones, the Internet, streaming media, and component makers, but others such as cybersecurity, the Internet of Things, virtual reality, the cloud, or health tech have only recently started to gain investors' attention.

When a Big Tech company is evaluated on the market, experts look at more traditional factors, such as overall sales, revenue growth or company profits. This is why well-established brands rarely see prices fall. Emerging brands, however, are evaluated based on their potential rather than actual profits and have some significant challenges to face to earn the trust of investors.

Still, how do you determine if a company that seems to have developed a steady customer base and shows potential is actually worth investing in?

By giving an honest answer to the upcoming questions.  

Does it add real value to the world around?

For a business to have a chance at surviving in the extremely competitive tech field, it has to add real value to the world around. Otherwise, if there is no actual need for it, who is going to buy their products and help their revenue grow?

This requires knowledge of the tech field, to help you spot up and coming products, or being up to date with market news and follow the trends experts speak about. For example, 2021 is going to be the year of cybersecurity, cloud infrastructure, FinTech, and e-commerce technology. Even though these are not new on the market, they have only recently started to gain investors' attention at a larger scale. Companies such as Shopify, Square, Etsy (News - Alert), and NortonLifeLock are amongst the top stocks for the first quarter of 2021.

Beginner investors can look at investment companies that have experience in the field and are able to spot businesses that have the potential to become big. In fact, as experts at explain, it can even be worth investing in investment companies and making money while also gaining access to valuable information.

How will this emerging tech be used in the future?

Investors know no industry is protected from obsolescence risk, which means products eventually become obsolete and the companies that make them become less and less relevant on the market. Given the tech sector's ever-changing nature, businesses it this field can be even more exposed to obsolescence risks.

When you spot an emerging technology, the best thing to do is follow it for a while. While investors take pride in being the first ones to spot the next unicorn, the current climate is not the moment to do so. We are witnessing an era of technology-driven disruption, and things are bound to change a lot in the following months and especially years.

Try to observe how the public receives this product or service and determine if there will be a real need for it a few years from now. If you are looking for long-term investments, this will save you valuable money.

Does it align with your investment goals?

While a lot of the aspects you need to consider when evaluating an emerging technology are objective, this is a purely subjective factor that is just as important. Your investment goals are going to determine whether a certain company is worth investing in.

Highly volatile companies require you to have the ability to navigate through uncertain market times, but they can turn out to be very successful investments in the future. Broadly speaking, it's a matter of whether you afford to invest that cash and let it sit there for a while. This is one of the golden rules of investment that applies regardless of the industry – only invest money you can afford to lose and try to buy stocks you can hold onto for a long time.

Are you prepared for a potential backlash?

Regulators and lawmakers have shifted their focus towards the tech industry, and there are going to be some tight regulations around tech firms in the following years. This could result in a backlash that can elevate market volatility.

Emerging technology will become a major focal point for lawmakers, especially since tech firms are known for taking advantage of today's limited regulations. If you are not ready to face a potential backlash, it may be better to focus on established tech that is less exposed to risks.

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