Has the Technology Cycle Peaked and what does that mean for your Share Portfolio
Following the Great Recession, there was great concerns expressed about an extended period of economic stagnation. In general, in the aftermath of the crisis, the recovery was unusually slow. One of the few areas of growth was the tech space. Following the crisis, new technology companies, with innovative products and services were introduced onto the market and they helped to drive the stock market.
Things have changed rapidly in recent years and tech stocks are now an important part of any stock market portfolio. Even those who are not investing directly into technology companies are impacted by the explosion in the value of tech stocks. This is because many are invested into technology ETFs and in general the tech stocks have helped to drive the entire market, and this has helped index-linked funds and even Mutual funds. So, in a word, every shareholder has benefited from the growth in the technology sector.
Many were concerned that this explosive growth in the value of tech stocks would end in a bust. There were those who believed that there would be a repeat of the dot.com bust in 2000. Then there were those who believed based on the Gartner Theory of technology adoption argued that the rise in the adoption of technology would soon plateau. This would, in turn, lead to a stabilisation in the value of technology shares and even lead to a fall in their value.
However, this was not the case. Technology stocks unlike in the build-up to the dot.com bubble began to generate revenues and profits. Moreover, the Gartner theory that predicted demand for new technologies would plateaus proved not to be the case. For example, the demand for cloud services and Enterprise Service Software has remained very strong and has shown high double-digit growth for a period of several years. It seemed that technology was entering a period of secular growth and that this would continue into the foreseeable future. This was justifying the often high PE ratios of Silicon Valley firms.
However, there are signs that this is no longer the case. Senior figures in the tech sector have stated that there may be a slowdown in the sales of tech products such as SASS and cloud services. The head of Salesforce and others have warned that growth would slow next year. Then there were some recent earning reports that indicated that the sales of tech products were slowing albeit still at a high rate. Then there was the issue of regulation. Until now tech companies even those in social media have been largely self-regulated. However, this is rapidly changing because of concerns about the use of users’ private data. Then there was the controversy over the use of social media platforms during the 2016 US Presidential Elections. This has led to increased calls for more regulation of the social media platforms and how they and other tech companies’ treatment of their user’s private data. This could impact on many companies business models who are dependent on commercializing the private information of users.
So how can investors manage the prospect that tech stocks may have peaked at least for now? It is important that they do not pull out of technology as there are still many opportunities to be had in the area. Moreover, many major companies have large cash stockpiles that will allow them to support their share price in the future. It is still important that an investor diversify their portfolio and move into areas such as commodities and utilities. Then they should adopt a selective approach to investing in tech companies. An investor needs to check the intrinsic value of the company and metrics such as the PE ratio. If they do this will identify companies that are resilient to weather any volatility in the stock market. It must also be remembered that the concerns over tech may only be a phase and that they may soon resume their rapid growth and issues such as regulation may be managed. Therefore, an investor needs to make sure that they are in a position to take advantage of any upturn.