‘If you can’t explain it to a 6 year old, you don’t understand it yourself’, Albert Einstein. And with this famous quote I shall be divulging and hopefully simplifying, as best I can, a world I knew very little about, yet heard a lot of media noise around – the world of technology companies, commonly referred to as ‘tech stocks’.
What is a technology company and a ‘stock’
This is a business entity that focuses primarily on the development and manufacturing of technology. Classical examples would be Samsung Electronics, Apple, Google, IBM, Huawei and Microsoft, among others.
We then define the word stock, which Investopedia refer to as a type of security that signifies ownership in a company and represents a claim on part of the company’s assets and earnings. In simple English, this would mean you own a ‘share or equity’ of a listed company.
Understanding the Technology Sector
The technology sector categorizes stocks involving the research, development, manufacturing and/or distribution of technologically based goods and services. This sector primarily contains businesses revolving around the manufacturing of electronics, creation of software, computers or products and services relating to information technology.
The technology sector offers a wide arrange of products and services for both customers and other businesses. Consumer goods like personal computers, mobile devices, wearable technology, home appliances, televisions etc. are continually being improved and sold to consumers with new features. As we all very well know with the newer model mobiles that launch which feels like every other month.
On the business side, companies are dependent on innovations coming out of the technology sector to create their business software, manage logistics systems, protect company databases and generally provide the critical information and services that allow companies to make strategic business decisions.
Each Tech stock needs an addressable market
How does one determine which tech stocks will outperform the market, not only for a few months on a momentum swing, but for many years to come?
Any company that is going to grow would need to have a market it can grow into. There is no need inventing a square football, you want to make sure that there is a market opportunity (usually in the billions of dollars), and you want to make sure that there are catalysts that can help new entrants get an outsize piece of the action. If we delve deeper into the analogy of a square football, Adidas was the first company to unveil a football with a microchip inside, namely the near-field communication (NFC) chip. It is always about being a game changer.
Let me not get carried away with my favourite pastime. Gaining a sense of technology itself does not mean you have to understand the technology but merely to determine whether the company uses the latest approaches and excels in a crowded marketplace with characteristic barriers to entry – you then have found yourself a winner!
I’ve selected 3 tech stocks in no preference of order, but preference of stock
1. PayPal (Paypal Holdings Incorporated)
One may feel that payment technology is everywhere, and that cash is a thing of the past, however, with the advances in mobile technology, 70% to 80% of global transactions are still paid in cash. That would essentially mean great news for the tech giant which is the pioneer of the online payments industry.
PayPal has been around for a while, but that’s more advantageous than detrimental. With a global brand that’s near impossible to replicate, a user base of nearly 200 million and highly sophisticated infrastructure it is a winner. PayPal is more than simply PayPal, there is Braintree, a platform that allows companies (such as Uber and Airbnb) to manage their digital payments. Then there’s Xoom, a service that allows consumers to make cross-border payments. But perhaps the most valuable asset is Venmo, a payments app that leverages social media features like posting messages about purchases. PayPal is one of my top 3 stocks.
2. Red Hat Incorporated (RHT)
Despite this tech stock being one of the older tech companies, having been around since the early 1990’s, the company still appears to be in the early phases of its core market, which is open-source software.
Open-source software is technology that’s free, and based off the efforts of developers who are willing to make contributions. It might seem ungainly, however this approach has led to the creation of hundreds of standout technologies for servers, app platforms, machine learning, software containers and even enterprise-level systems.
According to Shutterstock, a key to the Red Hat story has been the company’s focus on mission-critical technologies, such as hybrid cloud implementations, virtualization and even the internet of things. An interesting choice you might ask, but a stock that I consider ever-changing.
3. A company you may have never heard of before, Facebook Incorporated
Facebook is a tech stock that requires very little introduction. Boasting over 1,2 billion daily active users (DAUs) it is a giant that simply can’t be defeated. Growth rate has subdued, and temporary shocks may have had negative impacts to the share price recently, but don’t dare write off this game changing giant. Facebook has a variety of levers it can pull to pump up revenues should it need to. Namely, Instagram and WhatsApp which continue to grow in users on a daily basis. Add online videos as another auxiliary service to consider and this tech stock remains one of anyone’s top 3.
For many, tech companies are still developing “money from nothing.” Most tech stocks are driven through intangible assets, meaning intellectual property, community outreach, and branding. Consequently, it is difficult to create a thorough valuation.
This presents some tremendous opportunities for scaling upwards and developing growth, because the market is so unpredictable. Namibia has a few tech companies, however, no tech stock as yet. One day, sooner than later, we can look forward to investing in a proudly Namibian tech stock.