Technology companies: how to invest in times of major changes

From startups to established organisations, the technology sector offers countless opportunities for growth. Find out what to take into account when investing in technology companies, and which funds stand out.

The technology sector is vast and encompasses large companies that everyone knows, organisations that operate mainly behind the scenes and startups that are only a few months old. With so many options on offer, it may not be easy to make a correct investment decision. Find out why we should invest in technology companies and how to do it at Banco Carregosa.

Reasons for investing in technology companies

Technology-themed investments include companies engaged in the development, creation and distribution of technology-based goods or services. This broad definition applies to almost everything you use in everyday life – from home appliances to apps.

Why invest in technology companies? Because they have high levels of cash flow and a return on investment above the average of other industries:

Return on investment and free cash flow of US equities by sector, 2021.

Source: Blackrock

Additionally, the technology area was one of the fastest to recover from the pandemic – total spending in 2021 exceeded pre-pandemic levels.

Types of technology companies

There are different types of technology companies worth investing in. These are the main ones. 

Software companies

Microsoft is the largest software company in the world. But there are thousands of other technology companies whose patents protect lines of code, algorithms and revenue streams. These barriers to entry make them especially attractive to investors seeking long-term returns.

Hardware companies

With just a few clicks, you can quickly change software. But with hardware, such as smartphones or computers, this is not so easy. This power of loyalty gives any technology company the ability to generate profitability in the medium and long term. In this particular area, there are several growing subsectors – from smartphones, to microprocessors, fibre optics, graphics cards, 3D printers, batteries and sensors.

Content

This field includes all companies that make content available online. For example, streaming platforms (Netflix, Spotify), social networks and search engines (such as Alphabet, Google's parent company). It was one of the fastest growing areas during the pandemic, and the pace of user acquisition is expected to continue to grow.

Telecommunications

Among the technologies that have stood out the most in recent times, mention must be made of 5G. In addition to transforming the way we communicate, it has given investors new reasons to prefer the telecommunications sector. 

To invest in these technology companies, there are some best practices to keep in mind.

How to invest in technology companies

What should we take into account when investing in technology companies? There are 4 main factors, in addition to expected profitability: adoption, diversification, the resilience in the face of a 'techlash' and the ability to avoid obsolescence. 

Adoption

When deciding on an investment in technology companies, there is one metric that is sometimes overlooked: the adoption rate, or the rate at which a new technology is acquired and used by the public. 

Source: Statista

But this is not always the case. The complexities and limits of new technologies can decrease demand and drive away the target audience. For example, virtual reality began to be marketed from the 1990s onwards. Despite improvements in the technology, the adoption rate remains relatively low. 

The same happened with 3D television, which promised to bring the effects of 3D movies to the home market. The restrictions of the technology and the content limitations resulted in minimal adoption rates, at which time major manufacturers decided to discontinue production.

For this reason, investing in technology companies requires regular monitoring of the rate of adoption of new technologies.

Diversification

Rather than allocating all capital to a single type of technology company, it is advisable to diversify investment to protect long-term profitability. 

Investing in a single sub-sector means being exposed to market risk – which can be commercial or financial in nature. By diversifying, investors reduce exposure. Thus, the aim is to invest in several assets so that they are not all affected in the same way by market events.

Techlash

Both the US and the EU have been tightening controls on technology exports to countries deemed sensitive, tightening the tax system and the way revenues are taxed in each region, limiting the ability to transfer personal data across borders and ways of attracting new customers. All of these factors could increase the volatility of technology stocks.

It is therefore important to be prepared for a 'techlash', the name given to widespread public protest against a particular company or technology. 

The way to do it is to invest in business-to-business companies rather than in big consumer-facing technology brands in order to mitigate the risk of increased regulation.

"Future-proof technology"

This is something that simply does not exist. Any sector can be subject to the risk of obsolescence, and technology companies are no different. 

However, the transformation is not just felt in technology companies. Technology-using companies, many of which are far removed from the formal technology sector, are also feeling the impact of change. Sectors as diverse as real estate, energy and consumer goods face a risk of obsolescence that is dependent on what happens in the technology area.

Investment funds in technology companies.

Investment Funds offer exposure to several technology companies with high yield potential. These are the 3 examples of Investment Funds that our Investment Department usually follows.

BlackRock Next Generation Technology 

Morningstar Category: Equities Other

Launch: 04/09/2018 

The Next Generation Technology Fund invests at least 70% of its total assets in equity securities of global companies whose economic activity includes research, development, production and/or distribution of new and emerging technologies. These tend to be small to mid-cap companies.

Source: Blackrock

Find out more here.

Franklin Technology Fund N (EUR)

Morningstar Category: Technology Sector Stocks

Launch date: 31/12/2001 

The main objective of the Fund is to appreciate the capital invested. The Fund will invest at least two thirds of its total net value in variable income securities of companies that are expected to derive substantial benefits from the use, development and advancement of technology, such as technology services, including software, data and internet services; electronic technology, including computers and their associated products and electronic components; telecommunications, including data transmission networks, and related equipment and services; information and media services; conductive and semiconductor equipment; precision instruments. 

The Fund will invest in securities of well established companies as well as small/medium sized companies which the manager believes have good growth potential. See full information about the fund. 

Find out more here. 

Morgan Stanley US Growth 

Morningstar Category: Equities Other

Launch date: 31/10/2006 

The US Growth Fund's investment objective is to seek long-term capital appreciation, measured in US Dollars, by investing primarily in growth-oriented equity securities of large capitalisation US companies and, to some extent, foreign companies. Invests primarily in companies in the technology and communications services sector. The Fund may also invest on an ancillary basis in debt securities convertible into common stock, preference shares, warrants and other related equity securities. 

Find out more here.

Banco Carregosa, your partner when investing in technology companies

At Banco Carregosa, the Investment Department constantly seeks the funds that offer the greatest yield potential. Contact our experts to ensure that your portfolio is directed to the growth opportunities offered by the technology sector.

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