Yahoo Finance 9 Ways to Invest in Red-Hot Tech Stocks
Tech leads the S&P 500 so far this year.
Tech stocks have returned 11 percent so far this year, trumping the Standard & Poor's 500 index to retain their place as the market's leading sector despite a volatile April performance. The general outlook for tech stocks is cautious optimism, says Matthew Peck, co-founder of SHP Financial. "In this new on-demand economy, it's companies like Amazon (ticker: AMZN) that are positioned for growth, while other sectors are either too faddish or permanently out of style." The tech industry is also diverse, encompassing areas as different as video gaming and mobile payments. Here are the hot areas to watch, along with some potential downsides.
Big data and analytics are IT's wild card.
Like the rest of the market, information technology stocks have been on a wild ride this year, but that volatility "was a great buying opportunity to load up on shares," says Lane Mendelsohn, president of Vantage Point Software, a market research firm. Proven IT winners include semiconductors, technology hardware and equipment, and software and services. All three areas have boasted year-to-date returns approaching 10 percent. The wild cards, however, may be big data and analytics. Facebook's (ticker: FB) data breach has raised concerns about privacy that could create an unintended backlash against big data stocks.
Cloud computing brings a steady cash flow.
"Cloud computing might be the most attractive tech theme in terms of size and growth," says Mike Bailey, director of research at FBB Capital Partners. "We're talking about massive IT operations moving from dusty servers in the back office to gleaming data centers in centralized hubs." That shift saves startups and existing businesses money. Plus, unlike other tech sectors, cloud computing's subscription-based model generates steady revenue. "The companies will have monthly cash flow to continue to grow their business based on monthly subscription payments," Peck says. That stability can bolster growth, but cloud computing stocks, like IT stocks, also come with security and data privacy risks.
AI may be as revolutionary as the PC 40 years ago.
Artificial intelligence may be the hottest tech ticket as companies increasingly adopt the technology. "Over the next few years, we'll see early adopters of AI break out from the crowd," says Praful Krishna, CEO of AI company Coseer. AI could create disruption on a scale surpassing the introduction of computers in the 1970s and 80s. Peck says that despite its endless possibilities, AI also could lead to numerous dead ends where "the technology will not meet its potential or the adaptation will not be there." He suggests investors stick to the semiconductor companies that make the microchips that power AI.
Retailers push to expand e-commerce abroad.
All signs point toward e-commerce experiencing continued growth through 2018 and beyond, says Gautam Kanumuru, co-founder of investment research platform Yogi. Also, "we're seeing the continued commitment of established retail players [to] e-commerce," including brick-and-mortar retail giants like Walmart (WMT). That push to expand retail online extends internationally, with both Amazon and Walmart actively developing a presence in emerging markets. But investors should consider how other sectors, such as energy, might rob e-commerce stocks of some momentum. "Higher shipment costs could have an impact on stock performance," Mendelsohn says.
Video gaming's business model goes mobile.
Kanumuru says three trends will drive growth for video gaming stocks: millennials, new technology platforms like augmented and virtual reality, and a shifting business model. "The amount of ways to engage with video games is greatly increasing, and coupled with the continued growth of mobile gaming, the increase in accessibility bodes well for the industry." Gaming stocks can be unpredictable because a company's long-term success rests on a game's popularity. Video game developers assume a large upfront cost, but the game's reception largely dictates how quickly the cost is recovered. "The risk is not being competitive enough," Mendelsohn says, because "gaming is very closely tied into having a hit."
Cryptocurrency puts blockchain in the spotlight.
Considered part of the fintech sector, blockchain is carving out its own niche thanks to cryptocurrency's increasing visibility. "Blockchain-derived assets and products will continue to offer investors access to unique fintech and software-as-a-service technologies," says Eric Kovalak, CEO and managing partner of Vellum Capital, a cryptocurrency hedge fund. The challenge, Kovalak says, is that it's still difficult to generate fundamental valuations for individual firms or whole asset classes. "This makes the investment landscape for cryptocurrency seem very much like a venture capital or startup funding arena, which may be enticing because the returns also seem to match the outside risks taken by investors."
Developing countries embrace mobile payments.
Mobile payment stocks also fall under the highly profitable fintech umbrella. The mobile payment market is expected to grow to $3 trillion by 2020, led by Alphabet's Google (GOOG, GOOGL), Apple (AAPL) and Samsung, with smaller companies like Square (SQ) bringing up the rear. To really gauge mobile payments potential growth, consider what's happening overseas. "Many fast-growing, third-world countries are rapidly adopting mobile payments as the default form of pay because of the widespread use of mobile devices and added security that comes with paying via mobile apps," Kanumuru says. Investors considering newer mobile payment companies, however, should study their valuations and top-line growth to gauge overall health.
Self-driving cars will change the economy and society.
Tesla (TSLA) may be the most well-known company making self-driving cars, but it's no longer the only one on the road. Uber, General Motors Co. (GM) and Ford Motor Co. (F), among others, also have jumped on the autonomous vehicle bandwagon. "The self-driving car will be the next revolutionary change to the economy and society," Peck says. How the technology could evolve and whether consumers will embrace self-driving cars remain to be seen. Shares of Nvidia Corp. (NVDA), a leading chip maker for the vehicles, plummeted at the end of March after a pedestrian was killed in an accident involving Uber's autonomous car. This sector has huge potential but requires patient, long-term investors.
Health tech includes a diverse mix of players.
Health care may not fit the traditional tech mold, but it deserves investor attention, says Kenneth Colon, co-founder of Izzy Care, an AI-driven digital health and wellness platform. "Health care is always a little late to the tech game, but it remains one of the biggest sectors in our economy." Larger companies like Google, Apple, Amazon and Walmart are venturing into health tech, accompanied by dozens of smaller startups. Although an aging population should fuel demand for health tech, tax reform and rising health care costs could change the outlook for these stocks. "It's definitely a space worth keeping an eye on," Colon says.
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