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What to look out for when buying tech stocks

Felicia Tan
Felicia Tan • 5 min read
What to look out for when buying tech stocks
Looking to invest in FAANG or other tech stocks? Here's what you should know.
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While Covid-19 has decimated many industries and economies, it has accelerated the “digitalisation” of the economy, widespread acceptance of remote working arrangements, and, some might say, overall reliance on technology.

Stocks such as Zoom, Amazon and Netflix reached new highs at the height of the pandemic where everyone generally relied heavily on video calls, online shopping and stay-home entertainment in the midst of social distancing measures.

Sea, a Singapore-based but New York-listed egaming and ecommerce company, became the best-performing large-cap stock on Wall Street in August 2020. Along the way, it overtook DBS Group Holdings as the largest Singapore company by market value.

However, when pharmaceutical company Pfizer announced on Nov 9 that its Covid-19 vaccine developed jointly with BioNTech was about 90% effective in a trial of about “tens of thousands of volunteers”, shares in Zoom and Sea tumbled the next day.

See also: Sea Group reports net loss of US$425.6 million in 3Q2020 despite stronger performance of digital entertainment and e-commerce segments

How, then, do you tell which is a good stock to buy into?

Look at the company’s sector and its nature of business

With any stock, you should first identify the industry or sector that is on an uptrend, and whether that trend will remain on top.

Before that though, you can use long-term charts to determine if the trend is one that’ll continue to rise in the long-term or short-term.

Within the broader technology sector, there are many different specialised industry segments. This includes “traditional” computer stocks such as Apple, IBM and Microsoft Corp. Then there are internet stocks such as Facebook, Google, Snapchat and Twitter, as well as e-commerce stocks such as Amazon and Alibaba.

Then you have streaming service provider Netflix, electric car company Tesla, chip-making companies such as Intel, as well as stocks for Internet of Things, blockchain and artificial intelligence (AI), just to name a few.

Then some of these same names compete in the same arena. Google, Amazon, Microsoft, IBM, for example, all compete to offer cloud computing services.

Now, you’ll have to remember that not all technology stocks are built the same. The technology sector may be on the rise in general due to global digitalization, but there are stocks that may be doing poorly, especially those related to the hard-hit aviation and tourism industry.

Explore its fundamentals

While conducting fundamental analysis is seen by some as a tedious task, there is no escaping it if you’re looking to do proper research on whether your investment will be worth it or not.

By looking into the fundamentals of a particular company, you are essentially calculating the real value of the stock and whether its shares are currently priced below its fair value (also known as value investing).

How you do this, is to dig into the company’s financial reports, look at its income, revenue, growth potential, as well as the industry that it is in.

You should also take note of the company’s balance sheet, cash and cash equivalents – whether it has enough liquidity to sustain it during low periods. The company should also have a low debt-to-equity ratio and low gearing ratio – you want to be sure said company has good money management, and the ability to repay its debts.

See also: The difference between Fundamental Analysis and Technical Analysis

Identify overvalued stocks

During the height of Covid-19, with lockdown measures driving consumers to increasingly rely on digital services like Amazon, share prices spiked during the period, prompting some to ask if it’s still a good time to buy into the counter.

Amazon, which is currently trading at US$3,135.66 as at Nov 18, 2020, saw its share price surge from its US$2,000 mark in February before the market crash in March 2020.

The e-commerce giant, which now has a price-to-earnings ratio (P/E ratio) of over 90x, is considered overvalued by traditional standards. To stretch the realm of disbelief further, Tesla, led by its mercurial founder Elon Musk, commands a PE of ten times that of Amazon’s -- 898.94 times, as of Nov 18.

However, when looking into future-ready counters, you will also have to look into its return on equity (ROE), which shows how efficient a company is at generating profits by taking the company’s net income and dividing it by shareholders’ equity.

Price-to-sales ratio, where the company’s market capitalization is divided by its total sales or revenue for the past 12 months, shows how much investors are willing to pay per every dollar in sales.

Like the P/E ratio, a lower-than-average ratio indicates an undervalued stock. The reverse is also true.

Another way is to look at the company’s future expected earnings growth (PEG) by dividing the P/E ratio against the projected growth in earnings.

You should also be looking at a company’s past results and calculate the rate of its historical growth, keeping in mind one-off events such as foreign exchange (fx) gains or losses.

When calculating said company’s growth, you can plot it by using the three-stage dividend discount model where you assume aggressive or similar growth within the next five years, a slight decline in growth for the five years after, and zero to little change in the following years.

Have any investing questions for us? Let us know via the comments section.

For more stories on investing 101, click here. For more news and investment insights, see our print edition here.

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