Many big name investors like Warren Buffet and Peter Lynch were against investing in technology stocks. They were aware that they would miss many large winners, but were willing to make that trade off so they would have a certain guarantee of solid earnings. They argued that technology stocks with high valuations and complex business models were too risky to invest in. They may have been right sometimes but missed out on some lucrative areas.
A Missed Opportunity
For many young people entering into the investing sphere and professional world, they’ve grown up around all things technology. These large companies that have become major players and growth areas are not foreign ideas. In actuality their business models are similar to traditional companies. The only difference is the method of transmission or dealing with advanced products in the field of computing.
Over the past ten years the NASDAQ-100 Technology Sector index has gone up some 150% while the S&P 500 has a modest gain in comparison at 65%. Investors would be wise not to ignore tech stocks because an old investor couldn’t understand the concept.
You only have to look at Facebook’s stock to see how well they’ve fared even though they were lampooned and ridiculed as a non-viable company to invest in. See their current financials at Moneymorning.com.
Technology Stocks: Not That Confusing
If you were to look at Google, Facebook, and Apple, these three companies do not have that complex of business models. Facebook and Google get the majority of their money from advertising revenues. That is the heart of their business. Apple on the other hand gets the majority of its revenue from selling hardware. This hardware includes the iPhone that makes up most of the sales, following the Mac, and iPad.
The more users Facebook has, means more advertising revenues. So it’s simple really. As they market themselves to grow around the world and make Facebook an everyday pillar of life, their company grows through more advertising revenues. The same can be said for Google.
Expansion into Other Markets
One of the most unique things in the tech field is how interconnected a lot of different technologies are to one another. This allows for a successful company in one area to then branch off and dominate or compete in another. A perfect example of this would be Amazon. Once it had become the major player in e-commerce, the company moved to markets like retail, streaming entertainment and delivery services.
Google was just a search engine at first, the best search engine that is but it made even more out of that. It created applications, mail services, the largest mobile operating system and a web browser that created and unified an entire Google network. Facebook is another prime example of expansion as they have purchased Occulus VR, and continue to grow to look at the next direction the company should go in.
While some trends may be worth following, others lead companies right off the cliff into failure or falling far behind competitors. Microsoft is a prime example of not getting some things right and following the wrong trends. Microsoft made a lot of money through Windows and its Office programs. Instead of jumping into new disruptive markets, they followed trends that eventually lead nowhere.
Some of these trends went into Nokia’s headset and companies that failed to account for future increases in technology and different industries. The apprehension towards tech investing may have been spurred by the dot-com burst and fallout from that. This continued fear stopped many investors from reaping the benefits from successful companies.
Matured Technology Stocks
Tech stocks are no longer the outsiders in the finance world. It would be crazy to think that this could persist after they’ve shown dominance for such a long time. Apple and Microsoft are part of the Dow Jones. These companies provide understandable and investable businesses that can’t afford to be ignored.
Even the naysayers like Buffet caved and began to invest in shares of IBM and Apple. The same will hold true for these new companies on the forefront of their respective new technology frontiers. Apple’s focus for example on buying back shares has shown it is a stable company for investors.
These companies have a mark of maturity now to them that makes establishment investors more at ease when investing. Tech stocks can continue their period of growth for long stretches of time by offering great products and taking out their competitors.
About the Author:
Danielle Richardson is passionate about the stock market, a world she learnt about at her Father’s knee. Now following in his footsteps, Danielle enjoys sharing her knowledge and writing newsworthy articles for a variety of websites.