💻📱 Technology Industry Investment Guide
The Bottom Line is a newsletter from the Hump Days Markets Team that pulls information using tools normally only those working in the industry have access to and aggregates it all in an easy-to-understand report. Use The Bottom Line to learn more about innovative and exciting companies and make more well-informed investment decisions.
Note: This is not financial advice, and any investment commentary is strictly opinion only. Consult with a licensed professional before investing.
Intro
The tech industry in the United States is filled with the world’s largest and most influential companies (7 of the 10 largest companies in the world are U.S.-domiciled tech companies). They have risen to once inconceivable highs as the way in which the world functions becomes more and more online.
Tech has created a level of convenience and efficiency never seen before, that has forever changed how we communicate, interact, learn, and work. With new technologies and ever-improving products coming out daily, it’s hard to see the industry slowing down anytime soon.
Apple HQ in Cupertino California
Subindustries
The tech industry encompasses various subindustries that specialize in different areas of technology. Here are some prominent subindustries within the tech sector:
Software Development: This subindustry involves the development, design, and programming of software applications for a variety of purposes, including operating systems, productivity tools, business applications, mobile apps, gaming software, and more.
Hardware Manufacturing: Hardware manufacturing involves the production of computer components, devices, and equipment, such as smartphones, tablets, laptops, servers, networking equipment, semiconductors, computer chips, and other electronic devices.
Cloud Computing: Cloud computing involves the delivery of computing resources, such as servers, storage, databases, software, and analytics, over the internet. This subindustry includes cloud service providers, infrastructure-as-a-service (IaaS), platform-as-a-service (PaaS), and software-as-a-service (SaaS) providers.
Artificial Intelligence (AI) and Machine Learning (ML): AI and ML subindustry focuses on the development and application of intelligent systems that can perform tasks that typically require human intelligence. This includes areas like natural language processing, computer vision, robotics, predictive analytics, and automation.
Social Media and Networking: This subindustry encompasses social networking platforms, online communities, content-sharing platforms, messaging apps, and other digital platforms that facilitate social interaction, content creation, and information sharing.
Gaming and Entertainment: The gaming and entertainment subindustry involves the development of video games, virtual reality (VR) and augmented reality (AR) experiences, streaming platforms, content creation, digital media distribution, and interactive entertainment.
Other notable subindustries include biotech/health tech, FinTech, and Cybersecurity.
Competition and Product Differentiation
The industry is characterized by high profit margins, and with lots of money to be made, that attracts a wide variety of competitors. Competition in tech is high, as consumers and businesses have an increasing number of product offerings to pick. Competition keeps companies on their toes, and forces innovation and growth if they want to stay relevant. All of that is good for the customer, as you get an increasingly impressive end product at hopefully not an eye-watering price. The ability to command a price comes down to the level of product differentiation in the market.
A company like Apple, for example, prices its products at a premium, in part, because of the seamless experience across devices enabled by its software. Apple makes certain features only available to products within its own line, and this makes for “sticky” customers. These features make for elevated switching costs because once you replace your iPhone with a Samsung, you don’t get all the features out of your AirPods. Apple is not unique in doing this, but they are likely the best at it. Other companies where you see this happening are Microsoft with Excel and Adobe with Creative Cloud.
As an investor, tech companies have this unique advantage so having a strong understanding of a company’s differentiators and the switching costs for its consumers will be the key to picking good long-term investments. You can apply this to your own life as well; if you yourself pay for a subscription, evaluate how hard it is for you to make the switch to another company. If you have Netflix, is the content on Netflix that good to you that you can’t get yourself to switch over to Hulu or Disney+?
Common Characteristics
While the market contains a variety of important companies addressing extremely varied areas of technology, companies can be expected to share common features.
Low capital expenditures
Capital expenditures (CapEx) is an accounting term that refers to the money spent on repairing or replacing physical assets such as buildings, factories, and machines. Given much of the tech industry either doesn’t have physical products or their products are outsourced, what we see is that tech companies very rarely have significant spending in this area. There are outliers such as Tesla and Apple who made significant investments in new offices and factories, but otherwise, a company like Adobe that only does software has very little reason to spend a lot on CapEx.
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