Technology Stocks: Deal with care

The technology industry is among one of the great areas to invest and make profit from. Despite the high demand in technology, however, making money out of it is still a very challenging endeavor. History has proven that whenever a company registers itself with the dot com industry, it stocks will become super hot. In 2000, however, early investors lost their fortunes overnight. The dot com boom eventually became a dot com bust that resulted in huge losses when the bubble popped. Those who went through the ordeal learnt their lessons the hard way. This is why, it is now believed that the stocks of technological companies should be dealt with carefully. Here are some reasons why technology stocks should be handled with care.

• It’s a dynamic industry. In early 2000’s, Plasma TVs were very popular and expensive. However, when LCD TVs came along which promised less energy consumption and better image quality, sales of Plasma TVs were greatly affected. Eventually, they became less and less popular. Moreover, now, LCD technology is further being replaced by LED technology. Take a look at another example of stocks of internet companies. Friendster, considered to be one of the earliest social networking websites, fell down after reaching at its peak. This decline has been attributed to the rise of Facebook, which now dominates the global social media scene. As a successful long-term investor, you want your company’s business model to be strong and sustainable. You don’t one to wake up one fine morning to see the news that the business you own has become obsolete overnight. 
• Technology stocks tend to trade at  a high premium. During its IPO, technology stocks tend to trade at more than 100 times the P/E ratio. For instance, when LinkedIn when public, it was traded at a P/E ratio of 264. This means that it takes 264 years to recoup your investment based on their current earnings. Sometimes, even before a company makes profit, it can get a good price from the market because investors believe that the stock would eventually yield profitable returns when the great idea takes off. However, most ideas don’t take off and investors bear the financial brunt of their misplaced optimism.
• There can be a lack of a solid track record. A company can come up with a great idea to bring a particular technology to the market. However, an idea and executing the idea are two different things due to the dynamism of a fast moving market. The former always entices investors that it can become the next Apple, but the latter is hard to accomplish. Besides, trading at a premium, technology companies have insufficient track records. Therefore, it is difficult for you to study the historical earnings and assess the true value of the company.

You can definitely still choose to invest in technology stocks but before that, make sure that you understand the business and the industry very well. This applies to all other businesses as well. In investing, preservation of capital is more important than anything else. As the saying goes,”If you take care of the downside, the upside will take care of itself.”

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