Technology Stock Investing - An Update To Keys To Success 2-1/2 Years Later

by: Silicon Valley Insights


Product cycles and new technology trends trump most business cycles - but is the current market weakness foretelling a global business downturn?

Innovation versus competition continues to be an important fundamental.

Continue to judge management teams as business people, look for large markets, be a momentum investor and buy highly profitable cash generators.

Retaining winners and quickly selling losers even more important in volatile equity markets like now.

Major trends are not to see and can change over time.

Investing in the best technology stocks continues to potentially be very financially rewarding. For example, even in a flat market like in 2015, the four internet leaders, (NASDAQ:AMZN), Facebook (NASDAQ:FB), Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) and Netflix (NASDAQ:NFLX), were up 118%, 34%, 47% and 134%, respectively. We encourage you to use these updated keys to successful investing in tech stocks and see if you enjoy the process and make money.

1. Product cycles and new technology trends trump most business cycles - but is the current market weakness foretelling a global business downturn?

New products, markets and services continue to be the key for technology company success, especially of any sustained period of time. But short-term changes in the macroeconomic environment can have some impact and need to be watched for their both their actual impact on business levels and on stock valuations.

With the decline in oil prices and questions about industrial sector growth in China and some other countries, overall sales outlooks may have to be adjusted as we see the management comments and guidance in the upcoming earnings reports.

We are now in the early days of the December quarter earnings reports, which will provide highly valuable updates from the earnings releases and conference calls with company managements. As of this writing, we have just seen earnings reports from three technology companies last Thursday - TSM (NYSE:TSM) and Infosys (NASDAQ:INFY) Thursday morning and Intel (NASDAQ:INTC) Thursday afternoon. The TSM report was positive and helped trigger a good rally in many technology stocks on Thursday. INTC's results exceeded expectations for total revenues and earnings but the revenues from data center sector were slightly light in both the December Q4 and the 2016 guidance. INTC management said sales to the massive data centers of cloud services leaders like Apple (NASDAQ:AAPL), AMZN, FB, GOOG and Microsoft (NASDAQ:MSFT) continued strong but sales to smaller data center customers were less strong. This caused Intel management to add less than expected to their 2016 revenue guidance for the closing of the Altera acquisition that was closed at the beginning of Q1.

From these three very early reports, and a few negative pre-announcements it appears the outlooks for some sectors of technology may be somewhat less robust. However, even if this is the case there will be companies with strong new product cycles or expanding into new markets with continued robust outlooks. And as you are able to see where the continued strength is and is not, you will be able to adjust your investment positions accordingly.

The upcoming earnings reports will also reduce uncertainties, and thereby, could allow some re-expansion of multiples to revenues and earnings. This is especially important for the highest growth companies that carry the well-deserved higher valuations.

2. Innovation versus competition continues to be an important fundamental

The comments in our 2013 article continue highly valid. There are a few noteworthy updates based on the perfromance of companies in key sectors over the last 2-1/2 years. AMZN has continued to add to its range of services and offerings and is taking share from offline retailers at an even greater rate than before. And its Amazon Web Services (AWS) division has become the leading cloud sevices provider by an even wider margin. In Q3 2015, AWS revenues increased 78% YTY, helping to trigger unexpected levels of overall profitability for the company. It is highly likely that AMZN's aggressiveness will continue to the benefit of its growth rate.

In contrast, AAPL has had less in the way of major product introductions over the last year with less great advances in the latest iPhones and iPads and only a moderately successful first generation Apple Watch. New products are expected in March so possibly AAPL's overall outlook will improve enough to reverse the decline of the last six months so AAPL shareholders will not have to wait until fall for that to happen with the expected September introduction of the iPhone 7. AAPL's huge share price gains from 2003 to mid-2015 and then decline in H2 2015 are an excellent example of the importance of product cycles.

3-5 & 7. These keys from our 2013 article remain highly valid and do not need updating.

6. Retain winners, quickly sell losers.

Management of selling both winners and losers is most challenging in periods of equity markets correcting. Especially sharp ones like we have seen the first two weeks of January.

We continue to suggest selling losers faster and selling winners gradually. And sell them only on rally days like last Thursday, January 14th and then see if you are pleased or sorry to have sold your partial positions before selling more if the market continues to decline further.

The greatest challenge in selling positions in great fast-growing companies just because the overall equity markets are declining is to rebuild positions at lower prices before they rebound above where you sold them. When the declines in individual company shares are a result of a broad market decline, they can rebound strongly and rapidly when the market does. An example of this is the 30%+ rebound in FB from the August low to the November high in less than four months last year.

8. Major trends are not hard to see - and they can change over time

In our 2013 article, we noted how tablets were taking market share from PCs. Over the last 16 months since the larger screen iPhone 6/6 Plus were introduced, they have taken share from iPads and other tablets so this is the new trend. AAPL still grew rapidly overall with 30%+ revenue growth on 40%+ iPhone 6 unit growth driving 40%+ earnings growth in its September 2015 fiscal year. But as the iPhone 6s replaced the iPhone 6 with less impressive advances AAPL's growth has slowed.

PC sales are still declining, down about 10% in calendar 2015 and below the sales levels of 2009-2014.

These are the investing principles that form the basis of our investing philosophy that will be behind the investing ideas we will present from here forward.

Disclosure: I have positions in Amazon, Tableau Software, Facebook, Acrobat, LinkedIn and Netflix. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Disclosure: I am/we are long AMZN, DATA, FB, GOOGL, LNKD & NFLX.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.