We live in an age of technology, growing at an exponential rate as information becomes more readily available, and accessible. Tech giants have risen and fallen in the last 20 years due to exponential growth at which new ideas are discovered and developed. These trends are quickly becoming public, as new technology and ideas travel around the world with a single tweet. Tech has become a key player in today’s markets as tech companies pave the information highway of the world. This is a perfect example of a sector in the market that requires both fundamental metrics and a technical analysis overlay applied to fully understand the trends and factors that affect growth and decline. The digital era itself has allowed the creation of highly institutional grade research to help investors devise an informed decision making process.
The tech industry, as powerful a rise it has had, is lagging in the Australian Sharemarket. While Australia has a few tech titans, including $45 billion US-listed company Atlassian and the relatively new ‘buy now pay later’ trend bringing Afterpay Touch to the table at $8.7 billion, these technology stocks account for less than 3% of ASX listed stocks. Comparatively, in the US, 4 out of 5 of the biggest companies are tech giants; Facebook, Apple, Amazon and Alphabet (Google). The US tech sector has climbed 30% in the first half of 2019, with Microsoft leading the S&P IT benchmark, substantially driving the tech sector with a massive 39% increase in company stock this year.
The technology sector is still an important factor or economic growth as most other sectors and industries rely in some way on technology, enhancing, quality, productivity and profitability. Although the tech sector provides many products and services to other industries, it is still considered one of the most volatile sectors. It stands among the largest sectors in terms of market cap of over $73 billion, with constant exposure to new technologies. Current trends include cloud computing, AI, big data and mobile computing.
The local demand is increasing in the Australian Sharemarket, but Dale Gillham, Chief Analyst of Wealth Within has said Aussie tech fortune-seekers should tread carefully. “With the success of the technology sector in the US, more Australians are looking at our tech stocks, trying to grab a bargain and hoping to make a fortune. What most Australians don’t realise is that they are playing with a minefield that is very much hit-and-miss.” With the rise of FAANG (Facebook, Amazon, Apple, Netflix, Google) Australian consumers believe the trends convert to the Australian Sharemarket. The art of finding a good tech stock is the same as any other, the company must fulfil both the fundamental and technical criteria the same as any other listed company. A good product, good management and solid revenue streams are fundamentally key components, if the company doesn’t reflect these qualities then it is the same as gambling. These companies are not a ‘get rich quick scheme’, but with the right criteria, such as liquidity and minimal debt, can be a vehicle for growth. These companies should not be treated differently from any other companies listed, and should still be treated as such with the standard 5% portfolio allocation, as stated by Phil Usher, director of a well known stock market training hub.
There are key metrics that come with choosing technology stocks as with any other company in a volatile sector:
Investors must do their homework before investing funds in technology stocks in respect to the financial fundamentals of a company. This covers; earnings before tax, operating margins and company cash flow. This criteria can help an investor identify the companies ability to generate profit in the future.
Company Intrinsic Value
A company’s intrinsic value identifies the company’s projected value against the markets current valuation of the stock. This can help an investor identify whether a company is fundamentally undervalued, helping identify the optimal entry and exit points in the market.
Capital Funding Structure
This criteria is important when selecting tech stocks to invest, helping investors identify the capital structure of a company. Knowing how a company funds its business, i.e debt or equity can also reveal how a company manages its capital to create short-term liquidity to cover operating costs while reserving enough capital to fund expansion and growth without increasing debt.
Investors need to understand the technical analysis of a company, defining factors such as the trends of earnings momentum and relativity to stock price. Stocks with higher earning acceleration comparative to other companies within the sector are generally regarded at a higher price/earnings ratio due to the fact that investors invest in a stock with a higher anticipation of return.
Utilisation of Assets
An investor should also consider the utilisation of assets by a company, meaning how much the company is earning against each dollar of assets it owns. This is usually measured using the asset utilisation ratio.
As economies around the world continue to invest into the digital economy for both economic and social opportunities, Australia’s economic success will rely on the country’s ability to harness technological advances to create a boost for existing businesses and improve daily life, while creating new products and markets.