Choosing Tech Stocks in 2021
September 30 2021 - 7:47AM
Finscreener.org
Even with the S&P 500 Information Technology Index up by
roughly 21% this year, senior
equity research analyst Dan Ives foresees a strong further
rally in tech stocks for the rest of 2021. Supported by the Federal
Reserve’s steady messaging and the sector’s strong fundamentals, we
can expect to see tech stocks rising 7% to 10 % through year’s
end.
While there could be a headwind or two, concerns over the Delta
variant are likely to bode well for the tech industry, as people
continue to work from home, stream content, and order things
online. Emerging technologies such as artificial intelligence,
machine learning, 5G communications, and the Internet of Things
also further the potential of investing in tech stocks. Here are
three things you should know about choosing tech stocks in
2021:
Avoid using traditional valuation methods
Traditional investing requires you to evaluate the stocks you’re
interested in, usually through traditional valuation methods like
earnings per share, price to earnings ratio, or asset pricing
formulas — but it doesn’t work that way for tech stocks. Companies
in the industry have to continually invest back into research and
development. Video
communications software Zoom, for instance, were the clear
winners of the pandemic economy. However, their rapidly cooling
sales growth plunged stock prices down 15%. To stay ahead of the
competition, they recently announced that they will buy cloud-based
customer service software firm Five9.
Tech company investors have to understand that potential, rather
than earnings, are what investments hinge on. This is why tech
stocks often have high price-to-earnings ratios company profits
seem low compared to the price of their shares because investors
expect rapid future growth. It’s better to focus on key metrics
like price-to-sales, which compares stock price to company revenue,
or overall revenue growth for fast-growing companies without
substantial profits.
Monitor tech trends closely
If you can tap into an emerging market early enough, your gains
will be sizable compared to investors who are late in the game.
Since technology is such a fast-paced sector, it’s important to
commit to researching different markets like robotic process
automation, quantum processing, blockchain, and more. Remember,
blindly investing in tech stocks and assuming you’ll profit will
lead to losses. You have to know what youU+02019re getting
into.
To illustrate, AskMoney’s
finance articles highlight how progress in 5G connectivity
means investors should look at tech-adjacent companies as well.
Smaller, component-supplier organizations like Qualcomm Inc.
(NASDAQ: QCOM),
NXP Semiconductors NV (NASDAQ: NXPI),
and Corning Inc. (NYSE: GLW)
are expected to grow as 5G networks become more widespread. It may
also be a good idea to start looking into investing in connected
technologies. Reading news and industry reports on emerging
technologies will help determine your investment strategy.
Look into both tech giants and small
players
In our Warren
Buffett: 3 Tech Stocks Part of Berkshire Hathaway’s
Portfolio feature, we talked about how Warren Buffett
initially shied away from tech stocks because he didn’t understand
the sector well enough. In recent years, however, his company
Berkshire Hathaway investing in companies Apple, Amazon, and cloud
computing-based data warehouse Snowflake. If you’re interested in
buying tech but would prefer single-stock investments over mutual
funds or ETFs, it’s best to follow Warren Buffet’s suit and invest
in tech giants. These industry leaders are household names with a
long history of solid performance, and whose market share is not
eroded by the competition.
Of course, it’s ideal to diversify with game-changing small players
as well. Promising social media companies, smartphone glass
manufacturers, hardware makers, green tech companies, and software
developers offer high rewards at high risk some companies are still
in the research and development stage, so there’s no telling if
they’ll ever be able to commercialize their products. As long as
these companies continue to innovate and you perform due diligence,
however, it’s likely you can find success.
NXP Semiconductors NV (NASDAQ:NXPI)
Historical Stock Chart
From Mar 2024 to Apr 2024
NXP Semiconductors NV (NASDAQ:NXPI)
Historical Stock Chart
From Apr 2023 to Apr 2024