Technology Stocks' Competitive Advantage

Dear Reader, 

Technology stocks have been on a tear in 2020 with the Nasdaq Composite Index of predominantly technology stocks rising 43 % since the beginning of the current calendar year.

Why? Because of technology stocks' competitive advantage. Technology saves people money, time and effort. We are living in the fourth industrial revolution driven by artificial intelligence. Firms are using computers to do manual tasks and cutting human labor. Yes, new jobs will be created, but many of the old ones will be lost. People have to constantly change and learn new skills to thrive.

Yes, technology stocks are overvalued if based on Price/Earnings ratios, which is nearing the historic highs for technology stocks reached in the 2000 dot-com bubble. However, corporations will continue saving on costs, so in the next 7-10 years the future of technology companies is bright.

Especially good are the prospects of companies that extensively apply artificial intelligence. Basically, all technology companies use artificial intelligence in one way or another, so this makes technology stocks winner as a group. What is more, computers are getting ever more powerful and they can do tasks which were considered beyond their reach only 5 years ago. Thus artificial intelligence advances healthcare, data analysis, and industrial automation to unsuspected heights.

Yes, the technology bubble will soon pop, may be by the end of 2022 and the Nasdaq Composite Index could fall by more than 50 %. But from the ashes new technology leaders will rise. Capitalism's creative destruction at its best.

If I have to put a number on it, in the current environment I would say that technology stocks that trade at a Price/Earnings ratio of less than 25 are not overvalued. This does not mean that money losing technology companies' stock prices and technology stocks in general cannot go higher for 2,3 or even 5 years more. Human greed, irrationality and irrational exuberance can reach ever new highs.

So great risk management is essential. If one invests in high flying money losing technology stocks one has to be able to move quickly and close positions so as not to realize destructive losses. If the investments are in technology value stocks like Oracle, Intel, even Apple and Amazon a slower, more patient approach may prove more efficient.

Technology firms' competitive advantage lies in their low cost base, rapid iteration and ability to constantly change by applying limited resources to enhance people's productivity. None of these underlying factors will soon change so  technology's future looks bright in the next 20 years, even though we can suffer a stock market crash, with emphasis on technology stocks in the mean time.

Disclaimer: The blogposts and comments on this blog and posts on social networks(Twitter, LinkedIn, Facebook etc.) are not investment recommendation, are provided solely for informational purposes, and do not constitute an offer or solicitation to buy or sell any securities. The opinions expressed on the blog are Petar Posledovich's. Petar Posledovich does not guarantee the accuracy of the information presented on this blog and social networks. The information presented is "as is".

Petar Vladimirov Posledovich is not liable for any investment losses incurred by reading and interpreting blogposts on this blog and posts on social networks.

Conflicts of interest: I may possess some of the securities, currencies or their derivatives mentioned in the blogpost and posts on social networks(Twitter, LinkedIn etc.)!

Respectfully yours,

Petar Posledovich