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.

RELATED FAQS
  1. When does a growth stock turn into a value opportunity?

    Learn how fundamental analysts use valuation measures, such as the price-to-earnings ratio, to identify when a growth stock ... Read Answer >>
  2. What level of annual growth is common for companies in the Internet sector?

    Learn what level of annual growth is common for companies in the Internet sector in terms of revenue growth and earnings ... Read Answer >>
  3. What are common growth rates that should be analyzed when considering the future ...

    Learn about some of the most commonly used measures for evaluating a company's future growth prospects and analyzing it as ... Read Answer >>
  4. What price metrics can be used to compare companies in the industrial sector?

    Discover some of the best equity evaluation measures that investors and analysts commonly use for comparing companies in ... Read Answer >>
  5. What is more important for a business, profitability or growth?

    Discover how both profitability and growth are important for a company, and learn how corporate profitability and growth ... Read Answer >>
Related Articles
  1. Investing

    4 Tips to Evaluate Growth Companies (KO, AAPL)

    Discover the best metrics for stock investors to utilize when selecting and evaluating the best opportunities in growth investing.
  2. Trading

    Stock Analysis Basics: How To Forecast Revenue and Growth

    Forecasted revenue and growth projections are important components of security analysis, leading to a stock’s future worth.
  3. Trading

    Is It Time To Sell Technology Stocks? (LNKD, AAPL)

    Technology stocks have taken a drubbing in recent days. Is it time to sell them?
  4. Investing

    Income, Value and Growth Stocks

    Investors who buy stocks generally seek one of three criteria: undervalued holdings, growth potential or steady income. The characteristics of stocks in each of these categories differs accordingly.
  5. Investing

    Benefits and Risk of Growth Stock

    A growth stock is a share in a company whose earnings and sales are growing faster than those of most other companies.
  6. Investing

    Revenue Projections Show Profit Potential

    Examining how a company makes money can offer clues about its earnings potential.
  7. Insights

    Tech Stocks Are Having Best Year Since 2008

    Big tech stocks are up almost 23% this year, their best showing since right after the financial crisis.
  8. Investing

    How to Evaluate Stock Performance

    Learn how to evaluate stock performance. While what you look for in a stock could be different from another person, the way you analyze performance is the same.
RELATED TERMS
  1. Growth Stock

    Shares in a company whose earnings are expected to grow at an ...
  2. Value Stock

    A stock that tends to trade at a lower price relative to it's ...
  3. Growth Company

    Any firm whose business generates significant positive cash flows ...
  4. Growth Rates

    The amount of increase that a specific variable has gained within ...
  5. Stock Market

    Exchanges or over-the-counter markets in which shares of publicly ...
  6. Profit Margin

    Profit margin is part of a category of profitability ratios calculated ...
Trading Center