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Investing in technology typically involves investing in tech stocks such as companies producing semiconductors or providing software. Prominent examples in 2021 include Apple, Microsoft and Google. Investors are often attracted to tech stocks due to their huge scalability and growth potential, as well as innovation potential. Yet tech stock investing also comes with its risks.
Below, our investment team at Bure Valley Group offers this review of the potential rewards and risks of investing in tech. We hope you find this content useful.To find out more about our EIS and other investment opportunities, visit our portfolio page here. To enquire regarding our latest projects and funding, you can reach us via:
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The rewards of tech stocks
One of the most powerful aspects of tech stocks is their ability to develop new ideas, implement them and then make a profit. Google is a classic case in point. Still famously known as a search engine, this company has diversified its digital products to include the likes of Google Maps for travel, Google Translate for instant translation, Google Authenticator for two-step verification and also Google Hangouts for cross-platform messaging. This ability of tech stocks to pivot means that they can penetrate new markets if their existing one becomes unavailable. This flexibility is one of the main reasons that tech stocks can see very high returns – e.g. 34% or even more – in a relatively short space of time.
Tech stocks also have the ability to scale massively without requiring a proportionate ballooning in overheads. Think about it. If a company sells 100,000 more physical products – e.g. furniture – within a given timeframe, then it will need to spend significantly more on sourcing the materials, storing stock, employing salespeople and delivering products to customers. A tech company like Google, however, can sell 100,000s more of its digital/software products without incurring these extra costs. Perhaps it might need more data storage facilities and more support staff to handle customer issues, but there is not the same kind of physical distribution infrastructure involved.
Finally, there is the pervasiveness and permanence of technology. Just look around you – and look at yourself. Every day and everywhere, people are on their smartphones using the internet and apps to conduct their lives. Tech continues to penetrate new spheres of life and additional sectors. The world has become reliant on digital technology, and this is not going away any time soon. Adding the right tech stocks to your portfolio can be a good way to profit from this reality.
Risks to consider
Technology can be quite complex and this can lead investors to make mistakes. Warren Buffet once said: “Never invest in a business you cannot understand”. Yet many people invest in tech such as blockchain without really comprehending it, leading to costly mistakes. Whilst you do not need to become a web developer or software engineer, it is important to grasp the business model of a tech stock and how its products broadly work prior to investing large sums of capital. Some good questions to ask include: “How does this business make money?”, “Do I use it?”, “Is it useful?” and “Who are the company’s competitors?”
Another drawback of tech stocks is that their prices are often volatile, and are usually vulnerable to economic shocks and high inflation. This is because customer spending on technology is typically classed as “discretionary” (rather than “staple”), which is often cut back on when living costs rise or when people start losing their jobs. For instance, during a recession people may decide against buying a new smartphone and simply move to a cheaper, SIM-only deal with their network. They might also cut back on digital subscriptions – e.g. video streaming services. It’s worth noting that, on the S&P Global’s list of sectors with the most volatility, the technology industry has a standard deviation of 14.8% – putting it in fourth place.
You also need to pick your tech investments carefully because even long-standing, established companies can be vulnerable to disruptive technologies. A case in point is Nokia, which used to dominate the mobile phone market. Yet the rise of the smartphone wiped out its market share, and today Nokia has needed to pivot its business model more towards telecommunications and information technology. Investors should be especially wary of the risks involved with investing in tech companies with highly inflated valuations; i.e. based on audience penetration and reach rather than revenues. Tech is a very entrepreneurial sector where businesses quickly rise and fall, so make sure you do your due diligence! Also, bear in mind that technology products and services almost always face downward pressure on their prices, contributing to short lifespans.
Technology companies can be a powerful addition to an investor’s portfolio. Given their volatility, however, make sure your asset mix reflects your investment goals, strategy and risk appetite.
Interested in finding out more about the exciting startup projects we have on offer to investors here at Bure Valley Group? Get in touch today to start a conversation with our team and discuss some of the great investment memorandums we have available here:
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