What are the best indicators for evaluating technology stocks?

By Brent Radcliffe AAA
A:

Technology stocks are often some of the most discussed stocks on the news. Products and services offered by technology companies such as Facebook (FB) and Apple (AAPL) have become ingrained in the daily lives of millions of people. Investors want to spot the company that will roll out the next must-have consumer item or will be indispensable to businesses. Finding which tech stocks is a good bet is a bit more complicated than wandering the aisles of the local gadget retailer.

Tech stocks are most likely going to be considered growth stocks. This type of stock differs from value stocks, which are stocks that are trading for less than their apparent worth. The value of growth stocks, on the other hand, depends on expectations of future growth. Growth investors focus on incremental increases in earnings and revenue rather than dividends, hoping that share prices will increase if earnings/revenues increase even if the company is not profitable. The ultimate goal is capital gains.

There are several strategies available when considering the purchase or sale of a tech stock. Investors can evaluate how company earnings and revenue have changed over time. Did the company see an increase in earnings? No earnings growth should raise a red flag, especially for companies synonymous with having low head counts. How high has the growth rate been? Small companies – valued at less than $400 million – should show double-digit growth, while larger tech companies - $4 billion and up – have relatively lower rates. How long has the growth period lasted? While five years of positive EPS growth is desirable, more years are better.

Other important factors to consider are pre-tax profit margins, which indicate whether management is controlling costs and driving revenue - and return on equity, which shows whether assets are being used effectively. Investors can also look at analyst opinions on the stock, especially when it comes to projected growth. Because these are estimates, investors should take opinions and projected data with caution. Analysts look at the competitive landscape a company is operating in. Fewer competitors, higher barriers to market entry, and company ownership of patents are a few factors that could lead to increased future revenues.

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