Tech Investments 2020
The one-stop solution for technology investors with best-in-class FX-hedging utilizing №1 Risk-Cybernetics.
Author: Dr. Lanz Chan, CEO, Finamatrix.AI
DISCLAIMER: The information here is intended for use by “accredited investors” and “institutional investors” as defined in the Securities and Futures Act of the Monetary Authority of Singapore. Past performance is no guarantee of future results.
Owning a share of the world’s best tech-driven companies remains the surest way to build wealth over time. But many have no access to the potential returns of the lucrative technology sector — the NASDAQ-100 has grown 150% in the past 5 years. With a leverage factor of two, many funds have grown 300% over the past 5 years or about 60% returns per year.
In recent times, there is a new way to gain access to these potential gains, in a potentially big way.
Remember Bitcoin? At the time of writing, it is trading at above US$9000, while the highest prices were at almost US$20,000. Prior to 2011, Bitcoin was selling for below US$1.
The escalating values have been proven by the unparalleled network effect created by that vast system of users. Despite scandals and the growing threat of regulatory intervention, Bitcoin has been remarkably resilient, gaining about 100% in 2019. However, there is more to life than Bitcoin.
TECH-DRIVEN INVESTMENT THEMES
- Artificial intelligence (AI): This is where computers perform tasks that might have traditionally required a human brain. AI also encompasses deep-learning (where data scientists build computer models inspired by the structure and function of the human brain that essentially reproduces our ability to learn), and machine-learning (a type of AI where computers learn without being specifically programmed to).
- Smartphones: While Apple and Samsung lead this space, there are lots of secondary players making components, software, apps, and phones. “Smartphone” is sort of a catch-all name for handsets that can run apps, programs, and nearly anything else a computer might be able to do.
- Blockchain: While blockchain has gotten a lot of publicity because it’s the technology behind Bitcoin and other virtual currencies, it’s more than just an alternative payment method. Blockchain is “the digital, distributed, and decentralized ledger tethered to most cryptocurrencies that are responsible for recording all transactions without the need for a financial intermediary. In other words, it’s a transparent and immutable (i.e., unchanging) log of all transactions that don’t involve banks acting as a third party,” according to The Motley Fool’s Sean Williams.
- Self-driving technologies: Companies including technology leaders like Alphabet (NASDAQ:GOOGL) subsidiary Waymo, Tesla, and most major auto manufacturers are working on creating self-driving cars. In most places, that’s not even legal yet, but some driver-assist technology has already come to market, and it’s likely that self-driving cabs and even trucks will be in at least limited use reasonably soon.
- Computers and software: These are the companies that make the laptops, desktops, and tablets, and the software that runs them. This segment also includes component players like Intel (NASDAQ:INTC) and Advanced Micro Devices, which make the chips and processors that power computers, but also bigger well-known brands like Apple.
- The internet: Think of companies like Alphabet’s Google, Microsoft’s Bing and MSN, Twitter, and Verizon’s Yahoo, along with companies like Yelp that offer purely digital products. Most of these players are at least partially supported by advertising revenue, though some sell subscriptions and monetize in other ways.
- The Internet of Things (IoT): The IoT is the network of devices connected to each other and the cloud — the public internet that allows for links between far-flung systems. It’s everything from a smart thermostat that can adjust the temperature in your home to complex medical equipment that can order its own repairs.
- Streaming Media: You could argue that Netflix is an entertainment company, but it’s also a technology company that has created its own infrastructure. Netflix creates content for its streaming platform, but it also creates and maintains the platform itself. A company like Roku (NASDAQ: ROKU), which makes streaming media players, is more of a traditional technology sector stock, but could also be considered a member of the next category as it manufactures devices.
- Device companies: Players including Roku, GoPro, and Fitbit make devices driven by technology. In many cases, they also make the software that makes them run and gives them added functionality.
- The Cloud: The cloud is a system of computer storage that allows information and services to be accessed by devices from anywhere. The cloud allows companies (and individuals) to use services that are not resident in their devices. Amazon, Google, IBM, and Microsoft are all major cloud players.
- Cybersecurity: With data now housed in the cloud, on our devices, and even in the chips in our credit cards, keeping information secure has become a growing industry. Cybersecurity is about making sure information is only accessible to the people who are supposed to see it.
- Chip/Component makers: Some technology companies don’t make finished devices at all, they make the parts that go inside them. Intel is a good example of this, as the company makes the chips and processors that make computers work. This segment also includes companies that make memory, screens and other parts that go into technology devices.
A look at technology ETFs
An exchange-traded fund, or ETF, is a fund that invests in multiple stocks but is sold like a single stock that tracks a certain index and trades on a major stock exchange. It’s a way to own a market sector without having to rely on specific stocks. For example, you might buy an ETF of IoT stocks or small-cap technology stocks.
Just like a mutual fund, an ETF has an expense ratio, meaning that a percentage of the fund’s assets are used to cover management and other costs. The expense ratio includes management fees, advertising fees, and administrative fees. It’s expressed as the percentage of the fund’s assets that are used to cover operating expenses each year. In a broad sense, lower is better, but you should look at overall returns and not just the expense ratio when considering an ETF.
Who should invest in technology?
Technology stocks offer opportunities for both novice and experienced investors. The technology space offers opportunities for both growth investors and income investors, who can choose from several mature, established companies. Of course, because this is a sector that’s rapidly developing, there’s some growth opportunity even in mature companies.
Trying to get a clear picture for the value of a technology stock can be difficult as sometimes the products and revenue streams can be more complex than a consumer goods company, for instance, like Johnson & Johnson selling brands and products the average individual is familiar with. Companies can be valued using a number of methods, including earnings-based valuations, revenue-based valuations, cash-flow based valuations, equity-based valuations, and member-based valuations.
VALUATION vs POTENTIAL
When you decide whether to invest in one of these companies, look at valuation but also the market potential. There’s no single method for doing that, but you should consider the company’s forward earnings projections, and earnings growth rate for calculating forward price-earnings ratio and the PEG ratio. For growing companies paying attention to free cash flow and debt will help investors get a better picture of the overall financial health of the business.
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