How To Invest In Tech Companies

News | March 10, 2021, 10:17 AM | Brought to you by a Guest authorThe dream of every investor is to stake their money in assets that have high returns. Today, many promising stocks are in tech companies. According to CompTIA, the technology industry is expected to grow by 4.2%  to reach a 5$ trillion in 2021. The association is estimating the industry to grow a 5% compound annual growth rate (CAGR). NASDAQ reports that Venture capitals invested $88.1 billion in tech startups in the first nine months of 2020 amid the Covid 19 pandemic.

What are the tech companies exactly?

Tech companies research, develop and manufacture products that use technology. These companies fit into five broad categories.

Semiconductors

In this category, we have companies that manufacture computer chips. The largest semiconductor producer is Intel.

Hardware Providers

Hardware manufacturers produce tangible pieces of technology. For instance, Cisco is a hardware provider specializing in the manufacture of modems, routers, and switches.

Software Providers

As the name suggests, these companies write codes that run programs. Microsoft is the largest software provider in the industry.

Telecommunications

Telecommunication companies enable people to connect through wireless mobile plans and internet connectivity. Examples of giant telecommunication companies include AT&T and Verizon.

Internet Information Providers

The most popular internet information providers are Facebook and Google. These companies own websites that relay information to the general public.

Popular brokers supporting speculation on stocks

The industry is filled with brokers that offer stock trading (or trading CFDs on stocks). Among the biggest players are XTB, Plus500, AvaTrade and IG. All these brokers are regulated by at least one financial regulatory body in Europe and provide either their own trading platforms or popular platforms like MT4 or MT5.

Drivers Of The Technology Industry

The biggest driver of the technology industry is innovation. Coders, entrepreneurs, and software engineers are working around the clock to solve people’s problems using smart solutions. The good news is that most of these smart inventions are reaping big profits, pushing stock prices high.

Metrics to Consider

While the tech industry is on the verge of growth, this doesn't mean that you should invest blindly. It is imperative that you research the stocks’ sustainable competitive advantages and keep certain metrics in mind. Let's look at some of the most useful metrics and other viral considerations.

Price to Earnings Ratio

Price to earnings ratio (P/E Ratio) is a popular metric, especially for value investing. Value investing is a strategy used to pick stocks trading at a lower price than their intrinsic worth. Ideally, stocks that are cheaper than their intrinsic value rise relatively faster.

Assets Base

A company with a massive asset base is a good investment. This includes intangible assets such as copyright, regulatory protection, brand value, and patents.

Switching Costs

How easy is it for customers to change to a competing service provider? Some Companies block consumers in contracts with high cancelation fees. A restrictive process for switching from a companies’ service is good for a company’s stock.

Production Costs

The cost of production determines the profitability of a company. To be precise, a company with low production costs has a high competitive advantage in the market. Low prices boost sales and increase profit margin.

Network Effects

Network effects mean that each additional user of service makes the company more valuable. The effect is more pronounced on social media sites such as Facebook. Companies with an excellent network effect provide good investment opportunities.

Risks Involved in Tech Companies Investment

Unpredictability

Technology is highly unpredictable and therefore stock trading is very risky. For instance, a certain company can disrupt the industry resulting in proliferating stock prices. However, a new startup company may appear and outshine the disruptor. If you invested in the first company, your investment gains would dip as the company’s value goes on a free fall. This risk is quite popular in semiconductor and hardware companies.

Valuation

SaaS companies’ stocks are relatively expensive compared to other technology sectors. These companies tend to invest in sales and cement their hold on long-term market share.  This means investors will reap big profits if everything goes according to plan. However, they could dip massively if they fail to grab and defend their market.

Switching Costs

If customers rely on a company for all their services needs, switching to another company would be costly and time-consuming. In fact, some companies put in place high cancellation fees to lock customers. However, if another company emerges and offers to pay the high switching cost, it would eliminate the first company’s market advantage. This was the case of AT&T and Verizon. T-Mobile emerged with an offer to pay switch costs for AT&t customers.

Final Words

Tech companies’ stocks are some of the most rewarding investments. For instance, the future of amazon, intel Microsoft, HP, Verizon seems bright. However, you should do your due diligence before investing in a stock. There are great investment opportunities in less unpopular companies. To Give you a clear picture, companies such as Vontier crop, Arrow Electronics, and Synnex Corp boast the best P/E ratio in the market. In a nutshell, investing in tech companies is a prudent move. That said, you should do your due diligence and exercise a great deal of caution.