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Investing in Technology Companies, Is it a Good Time?

All these technology companies, which were born selling electronic devices or digital products, have been expanding and occupying traditional business spaces. And, the opposite is also happening at a forced pace. “Lifelong” sectors incorporate technology, mixing it with their traditional activity until they become inseparable.

They collect and process their customers’ data using complex algorithms to be able to produce the products that really interest them, and to be able to better segment their customers. The same happens with its production systems, to make them more efficient. And finally, they are forced to distribute their products digitally. 

If they don’t, they risk being gobbled up by every other major tech company. Or even, to survive, they are forced to endow their product with huge amounts of technology for it to survive. A very clear example is automobiles. Ironically, it is increasingly difficult to distinguish a car from a mobile phone with wheels (they practically drive by themselves!). 

So how should one invest in technology companies?

In this sense, a first reflection would be that technology is and will be increasingly an essential part of the economy, at all levels. This is why investing in technology companies is, and should be, an essential part of any portfolio that aspires to decent returns over the long term . With due diversification, yes.

However, by asset diversification, we do not understand dividing investments between different sectors, one of them being technology. Investing in Walt Disney or Walmart to diversify the portfolio, selling Netflix or Amazon contributes rather little. The traditional conception of sectors is largely archaic. Investing in the FAANG is not investing in a single sector. The important thing is to not only diversify between the labels of our investments, but what is really relevant is where the income of each company actually comes from. We want to ensure that these sources of income are sufficiently distributed, as uncorrelated with each other as possible. 

Much more relevant than the above is whether or not the valuations of all these “tech companies” have skyrocketed to irrational levels. Are we in a bubble? It depends a lot on each case. 

Types of technology companies 

Let’s separate them into three groups: 

  • Companies that “will be the future” : Companies that trade at apparently exorbitant multiples, that are paid at high prices compared to their profits, since they are expected to end up dominating the business segment in which they operate, with their future profits being exponential. The truth is that here the assessment is usually secondary. The really important thing is that they really end up being what is expected of them. In Fondos.com is where we feel more comfortable investing, and we prefer not to participate in this type of investment. The risk is binary: if we are right, if we find the Microsoft of tomorrow at today’s prices, the result can be truly sensational. But if something goes awry, today’s prices are most likely a death trap. There is not the slightest margin of safety. 
  • Companies that “are the future” : Emphasizing the change of verb tense. They are companies that have managed to establish themselves as benchmarks in their niche, erecting entry barriers and/or competitive advantages that are very difficult to break down. We should not buy them at any price, but they deserve to trade at a premium versus the market. And in addition, they tend to be very intensive in intangibles, assets that the current accounting system underestimates. In many cases, we see valuations that are artificially inflated. Many of these titles are cheaper than they seem at first glance. 
  • Companies that are the past : Any technology company whose profits have entered a structural decline seems cheaper than it really is. In other words, time causes the multiples to expand, even if the price stays where it is. The latter does not usually happen, the share price, in the medium term, ends up going hand in hand with business profits. It is the group that the long-term investor should avoid at all costs when he invests in technology companies. And thinking about it, in this segment there are many more “non-technological” titles than those in the sector in question. 

In short and in conclusion, we do believe that it is a good time to invest in technology. In fact, we think it always is. To ignore this sector, in my opinion, would be reckless. Another thing is that this can be done indiscriminately. The answer there is absolutely the opposite. Today’s markets are in exuberance mode.

The pandemic has accelerated the process of digitalization of the economy , and the companies that benefit from it have exploded, some to stratospheric levels. Very selectively, there are still good opportunities to take advantage of. But you have to be that, selective. The foregoing, however, is extensive to technology, and to almost all other sectors. 

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