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Tips for Investing in Tech Stocks

December 09, 2020 · 7 minute read

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Tips for Investing in Tech Stocks

It’s almost become a trope at this point. Your friend’s aunt bought some Apple® stock way back when and lives full-time on a yacht now. Your cousin knows somebody who knows somebody who bought some Microsoft stock for a few dollars a share in the ’80s and now they’re a billionaire.

These stories are practically the stuff of urban legend. But if you’re looking to buy a first tech stock or wanting to add some diversity to your portfolio, you may find the reality to be a little different from the stories. There are many different types of stocks, each with their own performance trends, pros and cons. Here are a few key truths worth knowing about investing in tech stocks.

Why Investors Are Investing in Technology

Much of the recent growth in the stock market overall has been concentrated in the shares of technology companies. As of late September 2020, the top five most valuable companies in the S&P 500 were almost 10 percent greater by value than the 300 smallest companies in the index.

These companies—Apple, Amazon, Alphabet (the parent company of Google), Microsoft, and Facebook—have an average market capitalization, or overall stock value, of well over $1 trillion and are worth more than $7 trillion combined.

All of these companies have done well in 2020, despite the economic volatility induced by the COVID-19 pandemic and upheaval in how people work, shop, and live. Where these stocks go, overall stock indexes will tend to follow, as they represent around one-fifth of the S&P 500.

•  Apple (AAPL). Market Cap: $2.1 trillion. P/E ratio: 36.84
•  Alphabet (GOOGL). Market Cap: $1.06 trillion. P/E ratio: 35.36
•  Amazon (AMZN). Market Cap: $1.68 trillion. P/E ratio: 129.29
•  Facebook (FB). Market Cap: $774.36 billion. P/E ratio: 34.68
•  Microsoft (MSFT). Market Cap: $1.67 trillion. P/E ratio: 38.32

Technology companies, especially ones that sell software, are widely considered among the most solid businesses, as their products are essentially free to reproduce but can be quite expensive to buy. Apple, for example, prices iPhones ahead of their competitors, sells a lot of them, and then operates an ecosystem of apps and services that generate steady revenue. Amazon’s success is attributed to the effectiveness of their operations and low prices. For Alphabet and Facebook, the sheer scope of their networks and popularity of their services allows them to sell more ads than their competitors.

Popular Technology Stocks to Own

The technology industry is incredibly diverse. These are some of the best-performing tech stocks in the last few years.

Netflix (NFLX)
•  Market cap: $238.79 billion
•  Price increase since the beginning of 2018: 182.06%
•  S&P 500 price increase since the beginning of 2018: 30.49%

Tesla (TSLA)
•  Market cap: $429.84 billion
•  Price increase since the beginning of 2018: 640.81%
•  S&P 500 price increase since the beginning of 2018: 30.49%

Twilio (TWLO)
•  Market cap: $48.14 billion
•  Price increase since the beginning of 2018: 1270.42%
•  S&P 500 price increase since the beginning of 2018: 30.49%

Nvida (NVDA)
•  Market cap: $348.27 billion
•  Price increase since the beginning of 2018: 191.37%
•  S&P 500 price increase since the beginning of 2018: 30.49%

Zoom (ZM)
•  Market cap: $144.84 billion
•  Price increase since April 18, 2019 (IPO date): 1314.58%
•  S&P 500 price increase since April 20, 2019: 20.07%

SoFi makes it easy to invest in tech stocks and more by offering commission free stock trading, real time investing news, curated content, and other relevant data for the stocks that matter most to you.

Different Sectors for Technological Investment

The technology industry is vast, filled with companies that specialize in different sectors of the market. For an investor, this means it’s possible to diversify, investing in tech stocks across a variety of sectors.

Artificial Intelligence

Artificial intelligence (AI), which typically refers to ways of processing data and automating decision-making that would otherwise be done by humans, has long been one of the most exciting areas of technology. While just about all technology companies use AI, the following are some of the more prominent companies that either specialize in it or deploy it to their clients and use it in their operations.

VMWare (VMW) Cloud computing and virtualization company
•  Market cap: $65.4 billion
•  Stock price increase this year: 2.55%
•  S&P 500 price increase this year: 7.99%

Alteryx (AYX). Data analytics company
•  Market cap: $9.38 billion
•  Stock price increase this year: 41.61%
•  S&P 500 price increase this year: 7.99%

Splunk (SPLK). Software company that specializes in data, AI, and machine learning
•  Market cap: $33.56 billion
•  Stock price increase this year: 39.7%
•  S&P 500 price increase this year: 7.99%

Transportation

Another bustling sector of the industry is transportation. Tech underlies all of transportation, and some of the most exciting companies are building electric cars, creating the batteries and software that support the navigation and operational systems in automobiles, or using software to connect drivers and passengers.

Uber (UBER) Ride hailing company
•  Market cap: $61.53 billion
•  Price increase this year: 18.06%
•  S&P 500 price increase this year: 7.99%

Plug Power (PLUG) Fuel cell company
•  Market cap: $6.54 billion
•  Price increase this year: 446.47%
•  S&P 500 price increase this year: 7.99%

Tesla (TSLA) Industry-leading and sector-defining electric car company
•  Market cap: $429.84 billion
•  Price increase this year: 451.33%
•  S&P 500 price increase this year: 7.99%

Streaming

The entertainment industry has been completely revolutionized by streaming. These companies offer direct-to-consumer content, including shows and movies, that are bundled together in a monthly subscription. There are standalone streaming companies, companies that include streaming as an ever-growing part of their business, and also companies that build digital and physical infrastructure to support streaming services. These are two of the top streaming companies.

Roku (ROKU) Streaming hardware company
•  Market cap: $29.06 billion
•  Price increase this year: 74.05%
•  S&P 500 price increase this year: 7.99%

Netflix (NFLX) Industry leading streaming company
•  Market cap: $238.79 billion
•  Price increase this year: 67.34%
•  S&P 500 price increase this year: 7.99%

Information Technology

Information technology (IT) is one of the broadest and most valuable sectors of the technology industry. It typically refers to how businesses store, transmit, and use information and data within and between networks of computers. These are a few examples of IT companies that are performing well.

Cisco (CSCO) Networking company
•  Market cap: $168.87 billion
•  Price change this year: -16.83%
•  S&P 500 price increase this year: 7.99%

IBM (IBM) Business technology company
•  Market cap: $112.16 billion
•  Price change this year: -6.04%
•  S&P 500 price increase this year: 7.99%

Microsoft (MSFT) Business software company
•  Market cap: $1.67 trillion
•  Price increase this year: 40.05%
•  S&P 500 price increase this year: 7.99%

Semiconductor Technology

Semiconductors are arguably the foundation of all technology. Semiconductor companies make the components that can be found in phones, computers, and other electronic devices. The manufacturing process for semiconductors is incredibly precise and expensive, making the industry ruthlessly competitive. Here are a few of the companies doing exceptionally well in this industry.

Texas Instruments (TXN)
•  Market cap: $139.93 billion
•  Price change this year: 26.62%
•  S&P 500 price increase this year: 7.99%

Intel (INTC)
•  Market cap: $227.75 billion
•  Price change this year: -10.53%
•  S&P 500 price increase this year: 7.99%

Broadcom (AVGO)
•  Market cap: $153.83 billion
•  Price increase this year: 20.34%
•  S&P 500 price increase this year: 7.99%

Evaluating a Tech Stock Before Investing

When it comes to investing of any kind, it’s important to carefully evaluate the stocks you’re interested in.
Technology companies in particular tend to have quite high prices-to-earnings ratios, meaning that the company’s profits may seem low compared to the price of their shares. This is often because investors are expecting rapid future growth.

Other key metrics include price-to-sales, which compares the stock price to the company’s revenue. This is something to consider in the case of a fast-growing company that doesn’t yet have substantial profits.

Another key factor is the company’s overall revenue growth—the pace at which revenue increases year-over-year or even quarter-over-quarter.

A more detailed metric that can be useful for tech companies is “gross margins,” which is the difference between a company’s revenue or sales and the cost of generating those sales, divided by total revenue. The resulting percentage indicates whether the company is able to make money on the actual product it sells and how much. If the other costs the company incurs can go do down as a percentage of total revenue, profits can grow more quickly.

Pros of Adding Tech Stocks to a Portfolio

There’s much to be said for investing in tech stocks, whether one is looking to diversify or buying something outside of an exchange-traded fund (ETF) or an individual retirement account. With artificial intelligence (AI) and machine learning (ML) on the horizon, there still might be a whole lot of world to change out there. These are some possible benefits of adding tech stocks to a portfolio.

There are many blue chip tech companies. The term “blue chip” comes from poker, where blue chips have the highest value. Blue-chip stocks typically refer to stocks from long-established companies with good returns. Today’s blue chips include huge tech companies like Facebook, Alphabet (Google), and Amazon.

Some tech stocks pay dividends. There can be benefits to dividend-paying stocks including consistent earnings, and they might indicate that the company is positioned to deliver strong performance.

Investors can buy shares in things they use. Most people use some tech in their daily routines. You might have a smartphone, a laptop, hop on a social network, or order groceries or clothing online. With a tech stock, an investor can buy a little piece of the companies they know and like.

It’s easy to diversify in tech. Tech stocks aren’t a monolith. An investor can add diversity to their portfolio just by purchasing different aspects of the tech sector, for example, buying stock in social media companies, smartphone glass manufacturers, hardware makers, software companies, and even green tech companies.

A great thing about the tech sector investing space is that there’s so much of it out there, and investors should be able to find something that works for their goals, ambition, and knowledge base.

Cons of Investing in Technology

Stocks can come with their own risks and potential downsides. Tech stocks are no different. As with any stock purchase, it’s helpful to do a good amount of research before buying a stock. Take these unique considerations into account before deciding to pull the trigger on a tech stock.

The potential for tech backlash. Some experts think increased regulation and government scrutiny could lead to a backlash against tech stocks that could affect their future prospects. They cite 2018’s passage of the European Union’s European Union’s General Data Protection Regulation “>General Data Protection Regulation (GDPR) and Facebook’s hearings before Congress as evidence that even more regulation might be coming in the future. But like many other sectors of the stock market, various tech stocks react in different ways in the face of volatility.

Buying what you know can be complicated. Warren Buffet says he only buys stock in a business he can understand. You might have a solid grasp on some of the social media giants, for example, but some emerging technologies might be a little harder to wrap your head around. You may have to ask yourself if you want to invest in a company that you might not fully understand.

Stocks may be priced too high. Some tech companies, like Amazon and Google, have shares that are well into four figures, so for a first-time tech stock investor, those companies may feel out of reach.

The Takeaway

The tech sector is huge, and it’s getting bigger by the moment as ML, AI, and other technologies push the boundaries. There is likely a company out there that could work for the goals of any investor.

New founders are working on startups in garages and basements, pushing on that next new thing that could change the world (and maybe mint a new college-dropout billionaire!).

SoFi Invest® offers an Active Investing platform, where investors can buy stocks, ETFs or fractional shares. For a limited time, opening an account gives you the opportunity to win up to $1,000 in the stock of your choice. All you have to do is sign up, play the claw game, and find out how much you won.

Get started trading with SoFi Invest today.


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Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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