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Why tech is too big a sector to ignore

Why tech is too big a sector to ignore

I had my early venture into tech stocks during my undergrad days when I knew nothing much about it. In 2014, I bought Groupon (NASDAQ: GRPN) and flipped it for a USD 500 profit. Bear in mind that I knew nothing about the valuation and the only reason I bought it was because I was a frequent user of Groupon.

Also in 2014, I bought JD.com (NASDAQ: JD) when it first listed and sold it at a loss. In 2015, I bought Alibaba (NYSE: BABA) and also sold it at a loss!

Since then, I stayed away from tech stocks and was sold by the idea of value investing. I started investing more into undervalued, out of loved companies, and avoided tech stocks which I couldn’t comprehend their business model. This itself has caused me to miss out on a lot of money-making opportunities

Fast forward to 6-7 years later, I knew the tech sector has grown too big too be ignored. Think FinTech, BioTech, PropTech and many more. I started reading more books and from online sources like Seeking Alpha, and feel more confident in investing with tech companies.

Below are the reasons why even if you are a hardcore believer in value investing, it is good to get some exposure into high growth, tech stocks, simply because tech is for the future.

 

A. Global technology market is only going to grow

Just last year, research consultancy IDC estimated global revenue of USD 4.8 trillion for 2020 and projected 2021’s global revenue to be USD 5 trillion. This is also largely due to the greater adoption of technology accelerated by the COVID-19 pandemic. IDC expects the growth of the tech sector to continue, estimating a ~5% compound annual growth rate (CAGR) for the industry through 2024.

Source: IDC

This represents a huge opportunity set for adjacent sectors / companies who can adopt technology to advance their progress or product offering.

 

B. Tech is complimentary and won’t be here to replace our jobs entirely

Look at the days where we had to look at stocks from the Teletext and read newspapers hardcopies. Tech has entirely changed that and introduced more convenience at our fingertips.

Computers and softwares are good at processing large amount of data in the most efficient time possible, whereas humans are the opposite and are better at making judgement calls. Hence, there are certain things that humans still do best eg. sales, customer service, making important board-level decisions which may affect the outcome of a company. By reducing the amount of time spent processing large amount of datas, tech can help to simplify one’s job and let humans focus on the critical aspects of a company.

 

C. Value stocks have been out of favour since 2010 while tech stocks have grown exponentially

The divergence between value stocks and growth stocks has started more than a decade ago. Take a look at the Russell 1000 Growth vs Value chart, where growth stocks have significantly outperformed value stocks in the last 2 years.

Source: Refinitiv

This makes the story for value stocks less appealing because you simply do not know when the divergence will converge given that markets are at best random. Having some growth, tech stocks in your portfolio will act as a “hedge” and improve your overall portfolio returns.

 

D. Unconventional sources from Seeking Alpha, Reddit can be way more useful than traditional brokers’ reports

This point is not so much of a reason why you should invest in tech but rather where you can find information to aid your due diligence. I use CapitalIQ for most of my general research on companies and one thing I find lacking from brokers’ reports when it comes to the tech sector is that they are WAYYYY too conservative. They look at historical figures, standard financial metrics, and usually give a target price that is just a few dollars over the IPO price of a particular tech company. I find this puzzling. Furthermore, most of the reports written by Wall Street Banks’ analysts, are simply not insightful.

My view of a good due diligence report should come from insiders in the industry, those who have gotten their hands dirty while being in the industry, rather than some finance-trained analyst trying to give their assessment on tech companies. And with this I actually find that Seeking Alpha and Reddit does have good due diligence reports if can you sieve through the noises.

Source: Reddit

E. Conclusion

It took me more than 6-7 years before I finally had the courage to plough back into tech stocks. Sometimes, being too fixated on a particular type of strategy may not be a good thing after all. It limits one’s view of broadening their horizon, and miss out on opportunities elsewhere. The best type of investors in my opinion are those who are nimble, disciplined, able to think out of the box and are farsighted. However, it is never too late to become the type of investor you want to become.

 

What other tips do you have when it comes to tech investing? Share with us in the comments below.

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Best wishes,

Finance and Toast

 



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