Investing in technology is open to everyone and represents promising returns in today’s ever-evolving world. So much so, that you can invest in technology without purchasing pure-technology sector stock.
For example, Amazon is renowned for its huge retail presence but it also has a multi-billion dollar cloud computing business and operates in the digital space. In the same vein, Starbucks, which resonates with most of us as retail or restaurant stock, has been a technology pioneer in the space of mobile payment.
Revenue growth from sales in emerging tech 2019: (Statista)
Emerging technology is showing no signs of slowing down, and the multi-billion dollar industry has proven to be an attractive sphere for investors worldwide.
When it comes to investing in technology, amongst other things, investors should distinguish between emerging and mature technologies.
In short, investing in emerging technologies is commonly done by investing in developing brands. They’re young, ambitious, innovative, and have the potential to make ground-breaking impacts – precisely what gives them the scope to be hugely profitable investments.
On the other hand, investors can buy into mature technologies. Whilst even the Apple’s and Microsoft’s of the industry still have to innovate to survive in the long-term, their strong base of products are largely entrenched in the market. Investing in such mature technologies can provide long-term revenue stability in the form of dividends.
But how do emerging and mature technologies compare when it comes to making strong, profitable investments?
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Valuation
Mature technologies
Mature technology companies are valued by traditional methods including, revenue growth, profit, and overall sales. Their stock is priced by the forces of supply and demand. Since the technology sector is ever-evolving, the stock price can rise or fall following the release of products, or even the announcement of new development.
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Emerging technologies
Emerging technologies, depending on how far along in their development, are valued differently. New startup technology companies cannot be valued on preexisting or historical performance indicators. Rather they’re valued largely on potential for sales – not profit.
Investors should carefully weigh up the value of a startup and assess its potential for growth. Most startups won’t yet be floating on any major stock exchanges. But there are other ways to invest in emerging technology startups, including crowdfunding platforms.
Rewards
Mature technologies
Many mature technology companies have established secure places in the market, have healthy cash flows and strong PR that mitigates external shocks. Their seismic position and high-value make for attractive investment opportunities for both novice and seasoned investors.
Investing in well-established technology companies comes with the opportunity to generate dividend income – a distribution of the company’s profits to shareholders.
Indeed, the technology sector accounts for some dividend aristocrats. That is members of the S&P 500 index have had a minimum of one dividend increase annually over the last 25 years.
The technology sector offers relatively low yields – just over 1% on average. Whereas the S&P 500’s average yield across all sectors is around 2.2%. This is expected since most technology companies reinvest a large portion of their profits into research and development.
That’s not to say that it’s impossible to find high yields. Take Microsoft for example, who offers a 1.83% yield and has continued to grow its dividends for 14 consecutive years.
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Emerging technologies
Emerging technology companies, new to the playing field and yet to have generated substantial profits for dividends, offer rewards in other ways. Buying shares in companies that you expect will grow significantly in the future, whilst risky, can be incredibly rewarding.
Since it’s unlikely that such stock will be valued at its fair intrinsic value, investors will either pay a premium for them or if they’re lucky, buy them at their undervalued stock price. This is because the stocks haven’t been valued for what they are worth based on previous data, supply, and demand. Rather, they’re valued for what they might achieve going forward.
Getting in early on stock can generate huge returns. Think Uber, Revolut, Facebook, for example. The latter priced its initial public offering (IPO) at $38 a share, and they fell to about half of that. Today, they sit merrily at more than $276 per share.
Whether you’re investing in emerging or mature technologies, look at the valuation but also the market potential for growth and returns. To do so, find access to the companies earnings projections and earnings growth rate.
For emerging technology companies, pay attention to cash flow and debt to get a more comprehensive picture of the overall health of the business.
Risk
The potential for high returns, by no means, means the technology sector is without risks. Technologies change quickly, and the ever-evolving nature of the sector means that one-time leaders can quickly fall behind. What’s more, promising emerging technologies can enter the scene and make a bang, only to fade out just as quickly.
Stock market risks each apply to the stocks trading on all major exchanges. Economic, social, and political factors can swiftly eliminate any promising investments.
And the persistent threat of competition in the increasingly researched and innovative sector could see your investment undercut by a bigger, better player in the market.
