Saturday, October 19, 2019

Some Considerations When Investing In Technology

Image by Pete Linforth/

Technology, or tech for short, is one of the most oft-quoted buzzwords among investors and traders. The technology sector, defined by Investopedia, contains “businesses revolving around the manufacturing of electronics, creation of software, computers or products and services relating to information technology”1. This sector had caused a bubble back in the late 1990s and early 2000s, and it is also leading the charge in changing or disrupting almost all aspects of our work and leisure lives.

The tech sector has various sub-sectors within, such as software and services, hardware, etc. Recent developments have seen it moving into or collaborating with other sectors (or other asset classes), from financial technology (fintech) with the banks to driverless vehicles in transportation. All these upstream, downstream and sidestream linkages are made possible with this thing called the internet, which by now had permeated into our everyday lifestyle.

With the sector being likened to a huge buffet spread, it is difficult to pinpoint where to start investing. In this article, I had cobbled up some considerations for you, hopefully they could provide the right guidance and set the correct direction to explore. 

Consideration #1: The Infrastructure

Although the internet is a vast, virtual place with unlimited boundaries, it still resides in physical objects called servers. Even the cloud services, like online emails and storage spaces, needed servers to house them. With this, we can look at the two areas in this consideration: servers and data centres (specialized buildings housing servers, which are mostly in the REITs asset class).

And it doesn’t just stop there. Besides servers, you can look at the peripheral equipment such as routers and switches, operating systems and specialized server software. You can use the concept of associative investing mentioned here previously in my blog to help you.

Consideration #2: Protection And Security

As long as anything is connected to the internet, there is the high possibility of a compromise to a computer system or network, be it a virus attack, a hacking incident or something else. It is precisely these vulnerabilities that cybersecurity is important and has a high potential. In monetary terms, the size of the worldwide cybersecurity market is forecasted to grow to about USD 248 billion by 20232.

We have heard of reports and incidents where databases have been hacked into, malware attacks causing networks to go down, cryptocurrencies being stolen, etc. As long as the internet is around, and the presence of people wanting to exploit it for their illegal gains, cybersecurity is here to stay.

Consideration #3: Electronic Payments

This one need no introduction as I believe most of us have utilised electronic payments (e-payments) in one form or another. Using physical cash or other types of payment documentation (e.g. cheques) are getting passé; in fact, the worldwide adoption of e-payments and its various forms e.g. mobile payments, are gaining traction. In 2019, China led the way in mobile point-of-sale (POS) segment, with a penetration rate of 35% and an annual average transaction of around USD 1,100 per user3.

The e-payment segment itself is very broad, covering hardware (e.g. terminals), software (e.g. POS systems), platforms (e.g. app portals), etc. With money involved, there is definitely overlapping with the financial sector, so this is another area to look into.

Consideration #4: What Other People Are Having And Using

This one is simple: see what most other people are having or using. Next is the hard part: knowing whether it is sustainable in the long run. The technology sector is full of fads, and identifying the long-term trend from the flash-in-the-pan fad is a big challenge (see here for my article and fads and trends). A good illustration was the quick rise and fall of netbooks back in the late 2000s due to the rise (and still rising) of tablets.

If you are still unsure on how to tell between fads and trends, you may want to look at the current market leaders instead, especially those that had at least withstood the test of time.

So How To Invest In Technology?

A point I would like to highlight is that for the tech sector and the companies in it, from a book valuation point of view most of them are overpriced, so a conservative value-based fundamental analysis (FA) with strict criteria may not yield a lot of counters to go into. Therefore, we have to view this sector from a growth perspective.

The simplest, cover-all way will be to invest in a technology ETF. There are also ETFs that cover considerations #2 and #3. However, these ETFs are not available locally, and you have to find them at the U.S. markets. If you are savvy enough, you can look at individual tech or tech-related companies, conduct FA and see which one has good potential to grow.

As mentioned earlier, there are other sectors and asset classes related to tech. For data centres in consideration #1, there are REITs available, and locally there is one pure data centre REIT listed. Some financial institutions are implementing fintech as part of their core structure, so that is another place to visit. Remember, FA and due diligence are required before making that investment decision.

1 – Frankenfield, Jake. Technology Sector. Investopedia. 13 July 2019. (accessed 18 Oct 2019)

2 – Shanhong, Liu. Size of the cybersecurity market worldwide, from 2017 to 2023 (in billion U.S. dollars). Statista. 16 Oct 2019. (accessed 18 Oct 2019)

3 – Buchholz, Katharina. China’s Mobile Payment Adoption Beats All Others. Statista. 7 May 2019. (accessed 18 Oct 2019)

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