A famous tech investor once said that the easiest way to become broke is to start as a billionaire and invest in the tech business. His comments couldn’t have come at a better time since a lot of them end up putting in thousands of dollars in a business they have very little knowledge of. Apart from the normal strategic and operational risks that all investors are exposed to, tech businesses pose a myriad of other unique risks. The unique risks that we are looking at are cut-throat competition and the ease with which new innovations are made.
In order to avoid the pitfalls that other tech investors have fallen into, there are several strategies that you can use. Here are some basic strategies every potential tech investor should learn about.
1) Know the basics
Unlike stocks held by investors in the energy, transport, and other sectors, a strategic tech investor should look at the growth opportunities that the target company has. Innovations are the key drivers of growth in tech companies. Metrics such as liquidity ratios, return on investors, and price earnings ratio make little sense in the tech business.
Business magazines and pieces of literature are littered with numerous examples of companies that lead to innovations until such a point that they started playing safe. In essence, this strategy slowed down their innovations hence seriously affecting their top line. Returns to investors stagnated. Their stocks fell drastically. In the tech business, the mantra is unique innovations, products, and ideas.
2) Check out on what is trending
The media continues to play a big role in promoting certain products and industry. Always be on the lookout for the hottest things. It happened with bitcoin. Shares gained about 500% in less than a year. The good news is that technology might be difficult to understand and the investor behavior is largely influenced by this frenzy. The media frenzy will most likely not come from nowhere. They develop consistently over time and as such, it is important to keenly follow the trends.
3) Know the growth metrics
While we have stressed the importance of not focusing on the valuation of the business, you should never ignore the growth metrics. Growth metrics are important because they may either be signaling growth or may be a contributor to growth.
When focusing on the growth metrics, you need to look at the upward growth of revenue in the recent years, compare the company’s return on equity to its peers, and check the earnings per share. Earnings per share measure the profitability of a business. Unlike other growth metrics which tend to make a comparison with other peers in the industry, earning per share can be looked in isolation over a period of time. EPS should be growing over time. The debt to earnings ratio of the business should not exceed five times the annual earnings of the business. Debt is good if only it is manageable and will not pose a threat to the going concern of the business.
Finally, the strategies listed above can be useful in helping tech investors put their money in the right stocks. Care should be taken since the fundamentals of evaluating a stock in the more traditional industries such as media are very different from those in the tech business.