Is it a good time to invest in technology stocks?

Summary

• The tech industry acted as a backbone to multiple sectors during the pandemic. Driven by the growing need for technological solutions, the sector flourished during the period.
• The sector reached its all-time high in March 2021, experienced a pullback in May, and then bounced back.
• Areas such as cloud, ed-tech, and e-commerce witnessed a massive surge in demand and the trend is likely to continue in the post-COVID-19 era.

The technology sector is massive and comprises several sub-industries related to the research, development, and delivery of technology-based goods & services. The sector includes companies engaged in electronics manufacturing, software development, computers, IT products and services, and many more.

Technology companies typically invest significant capital in research and development. These businesses do not hesitate in taking risky assignments that have huge potential to grow in the upcoming period.

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Technology space as an investment option

Technology space has always been an attractive destination for most investors. Generally, the big technology players dominate the entire sector. For example, in the US, some of the big players include FAANG stocks [Facebook (NASDAQ:FB), Apple (NASDAQ:AAPL), Amazon (NASDAQ:AMZN), Netflix and Google (NASDAQ:GOOGL)], Microsoft (NASDAQ:MSFT), IBM (NYSE:IBM), Intel (NASDAQ:INTL), and Cisco, among others.

Similarly, in Australia, there are WAAAX stocks that dominate the Australian technology sector. WAAAX stocks include WiseTech (ASX:WTC), Altium (ASX:ALU), Appen (ASX:APX), Afterpay (ASX:APT) and Xero (ASX:XRO). 

Any significant changes seen in these big players considerably impacts the overall sector.

After reaching its nadir in March 2020, NASDAQ Composite improved significantly by ~102.97%. In 2021, the index reached its all-time high on 26 April and then dropped by ~8% till 12 May 2021 and then bounced back.

In Australia, ASX 200 Information technology sector bounced back after the March 2020 low, achieving a new high on 10 February 2021. However, the index has dropped 16% since then and settled at 2010.30 on 08 June.

Technology trends that boosted during the COVID-19 period:

When people started working from remote locations and things went online, a few technology trends emerged, including:

• Ed-tech: Ed-tech or education technology grew significantly as schools and college remained closed and classes were conducted online. Technology was a saviour for students, teachers as well as parents, and gave rise to a more innovative teaching method.
• Online gaming: With more time at home, people looked for alternative recreation source, and online gaming proved to be a boon for them. As a result, the industry witnessed a surge in demand during the period.

GOOD READ: How is the Australian gaming industry placed amid a booming market?

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• Online grocery purchase and food delivery: E-commerce was well established before the pandemic. However, COVID-19 gave a massive boost to this segment as people resorted to online purchasing during lockdowns and social distancing norms.
• Telehealth: Telehealth was one segment that experienced a lift in the US as Medicare and insurance companies decided to pay virtual visits during the pandemic. COVID-19 gave birth to many home-testing kits and wearable devices.

DO READ: Virtual care is booming amid pandemic: A glance at the pros and cons of telehealth

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• Teletherapy: Treatment of COVID-19 was given priority around the world. Hence, to prevent the spread of the virus to other healthy bodies, medical practioners provided online consultation. Thus, it gave birth to teletherapy.
• Video Conferencing: As people were working remotely, team meetings and conferences went online, helping companies such as Zoom garner substantial attention.

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What can we expect from the sector post-COVID-19?

COVID-19 outbreak was a great lesson for the tech sector to help prevent the spread of disease, educate, warn, and lessen the impact of the disease. While no one can be sure about the duration, the pandemic is likely to continue. Hence, tech players would continue to leverage this opportunity and develop technologies and solutions that can help conduct business and operations with minimal human interaction, and thus preventing the spread of the infectious disease.

While technology cannot stop the disease's occurrence, it can raise an alert to prevent people from getting infected.

Below are some of the trends that could help revolutionize the tech sector post-COVID-19.

• Adoption of infectious disease-related innovation: COVID-19 severely impacted the aviation, hospitality, retail, and food & beverage sector. When things come back to normal, there is a huge possibility these sectors would adopt technologies to ensure they can run their operations smoothly without putting their employees at any health-related risks.
• Demand for biometric data collection would increase. The data would help to prepare for any future pandemics.
• People nowadays expensively use smartphones. Various apps on devices and their connectivity to the cloud would allow contact tracing and data collection related to public safety during such health-related challenges.

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Assessment of technology stocks in the upcoming period

The technology sector has constantly evolved and acted as a backbone to most sectors during the pandemic. Moreover, it continues to grow further as the dependence on technology reaches an all-time high.

At present, technology is all about software and computing power, especially the ones delivered via cloud services. The industry has attained its multi-decade high levels, with many businesses experiencing substantial growth. These companies project further growth in the upcoming period.

Some points to note while looking at technology stocks as an investment option:

• One should always be mindful of the volatility despite tech stocks delivering growth in profit margins. Experts believe that tech stocks could experience above average volatility.
• As the tech sector attained its all-time high in 2021, there is a chance people might see a pullback this year.
• P/E ratio is an important metric while looking for tech stocks as it would tell how the market values the stock with respect to its current earnings. For profit-making tech companies, a higher P/E indicates a positive outlook and earnings of the Company.
• For a non-profitable company or young companies, P/E would not be that beneficial. In that case, the growing revenue numbers could be a good indicator to identify the Company's growth prospect.
• In growing companies, people also see whether the Company started moving from the loss to profit making zone. If yes, then it reflects the increasing efficiency of the Company.