Trading Technology Stocks
Technology as a business sector has been traditionally one of the best stock-market performers in a Global scale. The stocks of companies like Microsoft, Google and recently Facebook and Samsung have delivered enormous returns to their shareholders in a couple of years. What really distinguishes the technology sector from classic business sectors are the great growth opportunities deriving from new emerging technologies.
What Characterizes the Technology Sector?
1) Unique growth opportunities (up to 30% annual industry growth)
2) The technology sector interacts with all other sectors of the economy
3) Need for investment capital in a huge scale (that is why all great players are listed)
4) Fast cycles of product obsolescence which create new demand after a couple of years
5) Weak strategic positions for most companies (empires can be created and destroyed in a couple of years)
Defining the Technology Sector
In general the technology sector contains hundreds of sub-sectors. Some of these sub-sectors are found in a primitive level (i.e. nanotechnology) other sectors are found already in maturity (i.e. computer hardware). Actually we could divide the technology sector in two main general categories:
(i) Sectors that involve companies which create sales, cash-flows and earnings today (Computer Hardware, Mobile Manufacturers, Networking etc)
(ii) Sectors that involve companies which are expected to create sales, cash-flows and earnings in the future (advanced robotics, nanotechnology, artificial intelligence etc)
Common investors should focus entirely on the category (i) and that means companies that generate today sales, earnings, cash-flows and probably they distribute dividends. It is very difficult to analyze, to evaluate and sometimes even to understand companies of the category (ii).
Technology and Sub-Sectors
From the grand total of hundreds of technology sub-sectors we can distinguish the four major:
(4) Internet Technology
The semiconductor sector is actually everywhere as every other technology sector needs advanced chips to operate. The chips in general can be divided into digital and analog circuits. The semiconductors industry is characterized by intense cycles following the cycles of the general economy. Some parts of the industry are found in maturity (i.e. computer chips) while some other parts of the industry are found in a primitive level (i.e. sensors).
Hardware is a really huge technology sector that can be found also everywhere in other technology sectors. The Hardware sector incorporates computers, networks, communications, peripherals and even some parts of consumer electronics. Most of the Hardware industry is found at maturity (i.e. personal computers) but there are also other parts offering high growth opportunities (i.e. smart-phones).
If the semiconductors and the hardware are the body of the new technology the software is the mind and the soul at the same time.
No advanced hardware matters without the existence of the specialized software. Actually software does not require expensive infrastructure and that is why software empires can emerge and disappear in a day. There will be always great growth opportunities in the software sector. For example as concerns the next decade we can mention specialized applications for mobile devices or “On-Demand Software” for Cloud Computer Applications.
(4) Internet Technology
Personally I can compare the revolution of the internet today only with the revolution of the Printing Press by Johannes Gutenberg in the 15th century. As the printing press led Europe to an industrial revolution in the same way the Internet drives the world today in the uncharted waters of free knowledge and global consensus.
The internet technology contains parts of Hardware and Software and can be divided in tens of other sub-sectors (cloud computing, CMS, internet applications etc). Actually all networking companies can be simply divided into Business-2-Costumers and Business-2-Buisness internet solutions. Both sides of the Internet Technology sector (B2B and B2C) can enjoy huge growth opportunities and especially as concerns e-commerce solutions.
Researching Tech Stocks and Web-Sites
There are numerous of sites for those investors wishing to research technology stocks. But if you want to prove really successful you must think always outside of the box. It is highly recommended to use empirical methods to evaluate tech companies. I shall provide you with an example.
Example using Empirical Methods
Let’s assume an investor wishes to invest in a new internet company based on a social site called XOSOCIAL.com. A traditional tech investor will get information by reading articles about this company and by evaluating also Income Statements, Cash-Flows etc. An investor thinking outside of the box will seek for empirical evidence before deciding to invest or not. This investor could analyze the XOSOCIAL.com site using several online tools (I use SEMrush.com) or he could use the metrics of Alexa.com. If you gain experience in using these data tools you can know with relative certainty which sites are really creating traffic and which not. Also investors can compare the metrics of a particular site in 2 different periods and define if the traffic is improving or getting worst. Additionally this investor could use the Google Page Rank to evaluate a site. If the home page of a site has Google PR=0 then either the site is very new or either the company operating this site has terrible relations with Google (bad news).
Empirical Methods are the best way to Thing Outside of the Box when Investing in Tech Stocks
Some Web-Sites for Researching and Trading Tech Stocks:
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