THE BLOG

Technology as an Investment

04/12/2013 11:56 GMT | Updated 02/02/2014 10:59 GMT

This year, technology seems to be dominating the business and finance news once again. The recent Twitter flotation has reignited investors' thirst for these high risk, high yield stocks. To some it may sound ridiculous that a loss making company like Twitter can have a multi-billion pound Initial Public Offering; others see it as only a matter of time until the loss turns to profit.

This time around, though, many key investors are saying it's different - that the hype around the latest IPOs is justified. Next year, a barrage of flotations is expected to be set off by the recent Twitter IPO in both the US and Britain, though the latter is still waiting for its first big IPO. Investors, though, are still wary!

What's more, this is an industry rife with speculation. When Facebook announced its latest record results in October, it was meant to silence the doubters with unprecedented revenues and profits, only for the founder himself a few hours later to report that Facebook was falling out of favour with the younger generation. Straight away, as if Facebook was dying, the the stock dived as if to say that the end of year financials hadn't made a difference. It's fair to say the word "volatility" springs to mind.

Yet still the allure of tech shares remains strong. It still seems as though everyone is looking for the next Apple or Amazon - and to be honest, who can blame them? If you'd invested $1,000 dollars in Amazon back in 1997, in today's money you'd have made yourself a tidy $151,000. Then you look at Apple, whose returns have been even more spectacular: an investment 10 years ago would be worth 47 times as much these days. In real terms, those who invested $5,000 in Apple stock in 2002 would now be sitting on a whopping $234,000. Thank you very much, don't mind if I do.

The Technology sector is also known for its heavy competition and rapid cycle of obsolescence - companies can disappear as fast as they rise. Take Microsoft, for example: it was one of the most successful companies of our time, yet now looks ready for the grave. Similarly, Apple was nearly dead in the 1990s; now look at it!

Next up, it looks like the turn of TV advertising, with 2014 tipped as the year when advertisers harness our information, delivering advertisements relevant to the household's interests directly to our screens. If this seems a little farfetched, ask yourself where it came from. Have you noticed that specific advert following you around the web? This is Google's work. They monitor our browsing habits and deliver adverts tailored to our interests. While it may sound like an invasion of our privacy, it has actually made advertising a more effective business by reducing waste and increasing profits. What's more, it's got rid of that "babes of the month" ad on the side of the page. Oh, wait...

All investments have their risks, but Tech investments have to be up there with the riskiest. The question is - how can we eliminate as much risk as possible when investing in technology? An individual from one of London's most successful tech private equity firms, who wishes to remain nameless, told us that 'tech is like any other investment - you have to think of safety in numbers, look for good management teams and look for ideas that have a high scalability factor. However, even then it still comes down to lady luck'.

Everyone we spoke to had one thought in common: timing. Many argue that while it's important in all industries, it's especially crucial with tech. Knowing when to get out is crucial, in terms of both growth and decline. Take Apple again: despite some serious lows that prompted an unlucky few to get out, other individuals invested at the perfect time.

Research is key with tech investment, especially if you're picking your own stocks. You have to ask yourself a few questions: how exposed is the company to competition? Can the large user base translate into revenues? And if a company is profitable, what are the chances of it staying that way?

Will Apple remain profitable in the long term? In a word, yes. Customers will keep spending with Apple mainly due to the dominance of the App Store and iTunes. As for Google, the future looks bright: with televisions themselves getting smarter and more connected to the Internet, it can expect to make some serious profits from YouTube next year as it evolves into a TV channel. Microsoft, on the other hand appears to have reached maturity.

More than ever, the tech industry is attracting huge investment, and is now the largest single segment of the market, eclipsing all others including the financial and industrial sectors. The trick, as with all these things, is to research, diversify with other stocks from safer sectors and never invest more than you can afford to lose. Unless, of course, you're in a gambling mood.