When stock markets are riding high on the crest of a wave more often than not it will be the technology sector which is leading the way. Investors feel a renewed confidence for the future, consumers have money in their pockets and everything seems rosy in the garden. We all know that investor sentiment can turn very quickly but why are technology companies so popular with investors?
Something different
The term technology says many things to many different people but the reality is it is either something very different we have never seen before or something today which has been improved upon. We all know what the banks do, we all know what the retailers do but investing in technology takes you into the world of the unknown and “something different”. In this world you can value a company on any multiple of earnings that you see fit, assuming the company even makes a profit, well at least in your own mind.
Technology shares can be volatile, hit or miss but it is possible to make money just riding the wave even if you don’t stay for the whole journey.
How do you value a loss-making company?
When the likes of Twitter and Facebook came to the stock market, and more recently Snapchat, they attracted more than their fair share of attention from investors. If you look at Snapchat, initially there was talk of an IPO price of around $20 but this fell to $17 in the days before the float amid concerns about investor interest. These concerns were misplaced with the shares moving ahead strongly in the first few days reaching a high of just under $30 a share. The initial $17 share price valued the company at around $20 billion with an additional $15 billion created during the temporary share price boom. So, the shares went from a valuation of $20 billion up to $35 billion and now they are back down to $20 billion – what changed about the company’s trading or fundamental?
This is a company which makes no profit, is unlikely to do so in the foreseeable future but still has a valuation of $20 billion even after the share price fall. Investors seem happy to take at face value the potential sales of the future, bearing in mind the massive customer base, but what percentage of this customer base is active? If the company stopped investing in research and development today, would it be profitable tomorrow? Where will future profitability come from?
So, Snapchat is deemed to be worth $20 billion by the stock market but makes no profit. In the good times researchers and investors are optimistic but in difficult market times these are the first type of shares to be hit. Trade them correctly during the good times and you can bank some significant profits, but if your timing is of, well, that is a whole different ballgame.
Trading technology companies
Very often when you are looking to trade technology companies on the stock market you look at sentiment as opposed to long-term potential. As we touched on above, the Snapchat share price increased from $17 at the initial IPO moving up to just under $30 within a very short space of time. Now, just a few weeks after the initial float the share prices fallen back to the IPO price of $17. There is no certainty that Snapchat will return to previous highs but it does seem like a company with a good customer base, good potential for the future and plans for further growth in the short term with long-term profitability.
Against this background rumours and counter rumours can move share prices, there is no easy way to value a company which is not making a profit and therefore if you tap into the right sentiment at the right time you can make some pretty impressive returns. Technology shares are on the whole more volatile than their traditional business counterparts but that does not mean that every technology company floated on the stock market will make you money, you need to be selective, and ensure your timing is perfect!
In one phrase, technology shares are as much a reflection of investor sentiment at the time as they are of the potential for individual companies.