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The U.S. stock market has had quite the rally these past several years, with the S&P 500’s 341 percent return easily eclipsing the 91 percent return that UK’s FTSE AllShare has produced within the same timeframe.
Undoubtedly a key factor that has made such a difference is the giant technology companies that built and operating in the country. Companies, like Facebook, Amazon, Apple, Netflix, Google, and Amazon, have become the new mainstay of the country’s economy.
This begs the question – should you invest your hard-earned money into the tech sector? Here are a few reasons to invest in technology stocks and who should be investing in them:
Over the past decade or two, the Nasdaq 100 tech sector has produced relatively higher ROI versus the S&P 500 and the DJIA. In fact, according to a report by the Motley Fool, the former has outperformed the two latter indexes by as much as 300 percent. Companies within the tech sector are in a better position to create products/services that disrupt the current market and, consequently, usher in new profitable market opportunities.
A relatively new category in the tech space is 5G. According to Money Morning, the continuous rollout and adoption of 5G networks worldwide could have the most significant impact over the next several years and is, therefore, a good place to look for tech stocks to buy.
The popularity and strength of tech stocks were recently tested by the coronavirus pandemic. A number of financial pundits and Wall Street bigshots were expecting COVID to ravage the tech sector’s phenomenal returns, yet such wasn’t the case.
Companies, like Chewy, declared a revenue growth of 47 percent in 2020 while cloud communications platform Twilio is enjoying comparable growth. Considering that the cloud-based communications market is anticipated to grow by 26 percent year-over-year, Twilio’s growth rate is here to stay.
Favorable P/E Multiples
Investors sold off a huge chunk of their technology stock portfolio, and experts are saying it is due to these stocks’ rich valuation. For the present investor, this is a good opportunity to buy high-growth companies at favorable prices.
The NASDAQ 100’s P/E ratio has dropped from its late 2020’s low of around 40, yet research suggests that some top companies are undervalued when based on the tech sector as a whole.
Who Should Buy Technology Stocks?
Investors who are looking to diversify their portfolio of value stocks with some growth companies should consider purchasing shares in a tech company. While the stock price of many tech giants, like Amazon and Google, is overwhelmingly high, investors with limited capital have the option to purchase fractional shares.
Younger investors who have the advantage of time are also good candidates for technology stocks, particularly stocks of tech companies that are dealing with embryonic technology, such as machine learning.
While technology stocks are a good investment, it’s best to do your research beforehand. Make sure you know the underlying technology, its potential applications, and the technical and logistical challenges it faces.