The technology sector is large and includes device manufacturers, software developers, cloud computing providers, semiconductor companies, streaming services, and wireless service providers, to name a few. Any business that sells a product or service heavily imbued with technology will likely fall into the tech industry.
Software companies are increasingly adopting a software-as-a-service model in which customers purchase a subscription to a program rather than a single license. This generates recurring income for the software publisher.
All of this material is powered by semiconductor chips. Semiconductor companies design and/or produce central processing units, graphics processing units, memory chips, and many other chips that help power today's devices.
Telecommunications companies that provide wireless services are part of the technology sector. The same goes for the video streaming companies that provide easy access to high-quality content and the cloud providers that provide these streaming services.
The Best Technological Stocks
Many of the world's most valuable companies are technology companies. Here are some of the most impressive tech stocks investors should consider in Q4:
Alphabet (NASDAQ: GOOG) is the parent company of online giant Google and the popular Android smartphone operating system.
Amazon.com (NASDAQ: AMZN) is the world's largest online retailer and cloud computing infrastructure provider.
Apple (NASDAQ: AAPL) produces iPhone, iPad, and Mac computers. Intense customer loyalty guarantees many loyal customers, and an ever-expanding range of services makes the Apple ecosystem rigid.
Cisco Systems (NASDAQ: CSCO) is the leading provider of corporate networking hardware that forms the backbone of the Internet.
Meta (Facebook) (NASDAQ: FB) is the world's largest social media company, with more than 2 billion daily active users on Facebook, Messenger, Instagram, and WhatsApp. The company (now called Meta) sees virtual reality as its future.
Intel (NASDAQ: INTC) is one of the world's largest semiconductor companies. Intel designs and manufactures central processing units (CPUs) for PCs and servers and special chips for uses such as artificial intelligence. The company is heavily focused on production, with plans to produce chips for other companies.
Microsoft (NASDAQ: MSFT) is a dominant software publisher known for its Windows PC operating system and Office productivity software. Microsoft is also the second-largest cloud infrastructure provider, after Amazon.
Netflix (NASDAQ: NFLX) is a leader in the video streaming industry, spending billions of dollars each year on content to keep its growing subscriber base connected.
Amazon, Apple, Facebook, Netflix, and Alphabet (Google) are sometimes grouped as FAANG shares. These companies dominate their sectors, and their stocks have produced impressive returns in recent years.
How to Analyze Technology Stocks
For mature tech companies that generate profit, the price-to-earnings ratio is a useful metric. Divide the total stock price by the earnings per share and get a multiple that tells you how well the market values the company's current earnings. The higher the multiple, the higher the value the market places on future earnings growth.
Many tech companies are unprofitable, so the price-to-earnings ratio cannot measure them. The increase in income is more important for these young companies. If you're investing in something that hasn't been tested yet, make sure it has good prospects for growth.
For nonprofit tech companies, it's also important that profits pass from losses to profits. As a business grows, it must become more efficient, especially regarding the sales and marketing expenses required to complete transactions. Otherwise, if the expenses increase as a percentage of income, it could be a sign that something is wrong.
Finally, a technological good is a good whose valuation is reasonable given its growth prospects. Finding out exactly what those growth prospects are is the hardest part. If you expect revenues to skyrocket over the next several years, paying a premium for the title might be a good idea. But if you're wrong about these growth prospects, your investment may not work.
Investing in an ETF (exchange-traded fund) that focuses on tech stocks is one way to avoid mistakes. The ARK Innovation ETF (NYSEMKT: ARKK) is one option, although betting on high-tech equity funds may be riskier than investing in the aforementioned tech giants.
Investing in technology stocks can be risky, but you can only reduce it by investing when you are sure the growth prospects justify your valuations.
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