Tech stocks expose investors to a vast selection of industries. That’s because technology has penetrated almost every aspect of life today. But investing in tech stocks can be a treacherous journey thanks to the volatility embedded into the share prices of these businesses.
With that in mind, let’s take a deep dive into this stock market sector, exploring the industry leaders, the risks tech companies face, and the opportunities that lie ahead for prospective investors.
What are Tech Stocks?
As the name suggests, tech stocks, or shares, refer to any business operating within the tech sector. In this part of the stock market, titans like Microsoft and Apple reside. And there are plenty of growth stocks delivering explosive returns for early investors.
However, these companies can have a vast range of business models, from software subscriptions to manufacturing hardware.
To demonstrate just how diverse companies can be, let’s explore some of the main sub-sectors that technology companies are already operating in.
- Semiconductors: These chips are needed by almost all modern electronic devices such as smartphones, medical equipment, and electric vehicles. Intel, NVIDIA and TSMC are some of the biggest semiconductor companies worldwide.
- E-commerce: These companies use technology to create platforms where companies and individuals buy and sell goods and services online. Businesses like Amazon, Alibaba and Shopify all operate e-commerce businesses.
- Consumer Electronics: Consumer electronics firms provide devices for everyday use. These devices could be used for communication, entertainment, or recreation. Household names such as Apple, Microsoft, and Samsung operate within this sub-sector, among others.
- Telecommunications: These technology stocks own and operate the infrastructures that enable data transfers in the form of texts, audio, and video across the globe. Vodafone, AT&T and Verizon are some of the most well-known names in this space.
- FinTech: Financial technology businesses improve and automate the delivery and use of financial services with the aid of technology. This drastically improves user experience as well as aims to improve the personal finance skills of individuals worldwide. Mogo, Wise, Fiserv and Robinhood are all tech shares to invest in the fintech industry.
- Software & Services: These groups utilise technology to provide software and services to users. These applications are endless. So, it’s not surprising that this small segment of the tech stocks alone is forecast to reach $1.1trn by 2026. Some leading businesses within this space include Salesforce.com, MongoDB, Oracle Corporation, and Cisco Systems.
What are the Main Risks to Tech Shares?
As with most investments, investing in tech shares is not a risk-free endeavour. The technology space is, frankly, saturated. The barriers to entry within this industry are virtually non-existent, especially for software firms. After all, anyone with a laptop can start programming. And it’s why older businesses often find themselves being disrupted by a younger start-ups.
However, it’s also worth noting that the industry titans today largely remain in power with massive chunks of market share due to their adaptability. Therefore, resistance to disruption, in my opinion, is largely dependent on the company’s ability to evolve.
But in such a competitive environment, legal battles are commonplace. Intellectual property rights disputes between companies are often ongoing and can be disastrous for younger businesses. Why? Because if the budget is being spent on lawyers instead of innovation, obsolescence quickly beings to rear its ugly head.
It also results in most companies remaining unprofitable for decades as they have to aggressively spend on marketing to rise above the crowded space. It’s not uncommon to see tech stocks entirely dependent on external financing. And with negative cash flows, debt is rarely a viable option making equity the go-to solution. But suppose an economic downturn were to occur. In that case, the availability of such capital could become severely restricted and potentially lead to bankruptcies in some instances. Like I said, investing in tech stocks is a risky business.
Key Financial Metrics
Due to the high-risk nature of the industry, investors should know which financial metrics are essential to watch. Personally, I always look at these factors when analysing tech stocks.
- Debt-to-Equity – Demonstrates the degree of financial leverage a business is exposed to. This can be a giant red flag if I see shares of a tech company being highly leveraged but with little to no positive cash flows.
- Current Ratio – The Current Ratio is a quick way to verify whether or not a company has enough cash or equivalents to meet its financial obligations. An unprofitable business with no cash in reserves could be heading down the road to bankruptcy.
- Profitability Ratios – Measures a company’s ability to generate profit relative to its revenue, balance sheet assets, and operating costs over a period. The list includes Return on Equity, Earnings per Share, Dividends per Share, Return on Capital Employed, Return on Assets, Gross Profit, and Net Profit.
- Shares Outstanding – Most of these companies are heavily reliant on equity financing to keep the lights on. But this causes shareholder dilution for anyone investing in tech shares which is undesirable. If the number of shares outstanding is rising rapidly, it could be a sign that this business is burning through cash at an alarming rate.
Key Terms when Investing in Tech stocks
Technology can be a complex topic to discuss. Below is a compiled list of key terms I feel investors should know before investing in any tech shares.
- Artificial intelligence (AI) – A computer or robot’s ability to do things that can only be done by humans ordinarily because they require human intelligence and discernment.
- Application Programming Interface (API) – APIs aid a software program interface with another piece of software or platform.
- Business-to-Business (B2B) – Refers to businesses that offer their services or products to other companies.
- Business-to-Consumer (B2C) – Refers to businesses that offer their products or services to final consumers.
- Back-End – The part of a program’s code or computer application that enables it to function, which cannot be accessed by users.
- Back-End Developer – Software developers that specialise in building a technology backend.
- Customer Acquisition Cost (CAC) – Refers to the cost of winning a customer to use a product or service.
- Churn Rate – Refers to the rate at which customers stop using a service or product within a period.
- Cloud Computing – A form of computer service delivery over the internet on-demand.
- Deployment – Refers to the process of making software available for use.
- Early Adopters – Anyone that uses a technology product before it is adopted by the majority of users.
- Front-End – The part of a program’s code or computer application that the user directly interfaces with.
- Front-End Developer – Developers who design the part of technology products that are seen by users.
- Hardware – The physical parts of a computer or technology that can be seen and touched.
- Intellectual Property (IP) – Refers to the creation of the mind. In the context of technology, it will cover particular designs, software etc. IP covers patents, trademarks and copyrights. IPs are assets of companies.
- Lifetime Value (LTV) – The monetary value a customer brings to a technology company as they use its products or services.
- Open-source – Refers to software whose source code is public and anybody can inspect, modify and enhance. In other words, the IP right holder allows users to study, change, and distribute.
- Software-as-a-Service (SaaS) – A business model where customers pay a monthly or annual subscription to access a specific piece of software.
- User Interface (UI) – Refers to how a user interacts and controls an application or device.
- User Experience (UX) – Refers to how a user feels about using a service or product. It involves the user’s emotions and attitudes towards a product or service.
What is the Market Size
Today, all the trillion-dollar businesses are tech stocks in some form. In fact, all the US tech stocks combined are estimated to be worth over $9.1trn!
Needless to say, the opportunities when investing in tech shares are quite gigantic. And each of the different sub-sectors are also multi-trillion-dollar opportunities. For example, a report by Precedence Research estimates the global consumer electronics sector will be worth over $1.13trn by 2030 compared to $724bn today.
Meanwhile, analysts from the firm Research and Markets are predicting global e-commerce will reach a massive $55.6trn by 2027!
Predicting which tech stocks will succeed in capturing this market opportunity and delivering those returns to shareholders is anyone’s best guess today. But it’s possible that existing industry titans may continue to lead the charge over the next decade. That certainly seems to be the opinion of investment experts. Why? Because technology stocks can often be found in various growth ETFs and funds.
With that in mind, let’s explore some of the biggest UK and US tech shares trading today.
Top Tech Stocks in the UK by Market Capitalisation
Below are some of the biggest tech stocks listed on the London Stock Exchange United Kingdom by market capitalisation.
|Sage Group (LSE:SGE)||£7.51bn||Software & Services||Provides technology solutions & services for small and medium businesses|
|AVEVA Group (LSE:AVV)||£6.56bn||Software & Services||Provides engineering & industrial software solutions|
|Avast (LSE:AVST)||£5.99bn||Software & Services||Provides cybersecurity solutions to over 435 million users.|
|Auto Trader (LSE:AUTO)||£5.99bn||E-Commerce||Online platform for buying and selling automotive vehicles.|
|Just Eat Takeaway (LSE:JET)||£4.75bn||E-Commerce||Operates an online food delivery marketplace.|
Top Tech Stocks in the US by Market Capitalisation
The table below contains the largest tech stocks in the United States by market capitalisation.
|Apple (NASDAQ:AAPL)||$2.57T||Software & Services, Consumer Electronics, FinTech||Apple’s main products are iPhones, Macs, iPads, Wearables, Home and Accessories.|
|Microsoft (NASDAQ:MSFT)||$2.09T||Software & Services||Own the largest operating system for PCs. The company also offers productive software and cloud storage devices.|
|Alphabet (NASDAQ:GOOG)||$1.55T||Software & Services, Telecommunications||Offers various products and services globally.|
|Amazon (NASDAQ:AMZN)||$1.26T||E-Commerce, Software & Services||One of the largest online retailers and cloud server providers in the world.|
|Tesla (NASDAQ:TSLA)||$941.89bn||Consumer Electronics||Tesla operates the largest network of connected electric vehicles.|
Should I Invest in Tech Stocks?
The technology sector presents several opportunities for me. Clearly, there are hundreds of companies to choose from. And each comes with its own set of risks that investing in individual tech stocks exposes me to. I already have a handful of these businesses in my portfolio today. And they have been volatile, especially now that there’s rising inflation and interest rates.
With that said, I don’t believe investing in tech stocks is the right move for every investor. Those who are more risk-averse may be better off looking elsewhere. But for investors willing to take some additional risks, this industry, in my opinion, hosts some of the largest long-term growth opportunities.
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Prosper Ambaka does not own shares in any of the companies mentioned. The Money Cog has published Premium reports on NVIDIA, Shopify, Mogo, Fiserv, Robinhood, MongoDB, and Tesla. Views expressed on the companies and assets mentioned in this article are those of the writer and therefore may differ from the opinions of analysts in The Money Cog Premium services.