Trends in tech stocks

Author

Liz Fisher, journalist

We kick off a series looking at a wide range of technology trends by looking at tech stocks, their performance as an asset class, the key players, and the role of the Big Four in the sector.

Tech stock investments have never been for the faint-hearted. In 2000, the first dotcom bubble well and truly burst, wiping out all of the Nasdaq gains made in the previous five years and marking the end for thousands of tech startups.

Volatile

Those that survived, though, and thrived amply illustrate why many investors still love tech stocks. Five tech companies – Apple, Microsoft, Amazon, Meta (Facebook) and Alphabet (Google) – dominate the US stock market, accounting for 22% of the market capitalisation of the S&P 500 in the first quarter of 2022. Yet the performance of the Big Five, or Big Tech, along with other tech stocks worldwide, is volatile.

In 2000, Amazon and Alphabet were both unprofitable; today they are the two biggest companies on the US market, with a combined value of US$5.2trn and profits of over US$100bn in 2021.

Winners and losers

The barriers to entry in the tech sector are low. Some of what are now the biggest companies in the world started their life in a student dorm or a suburban garage. But the speed of innovation and level of competition means the failure rate of tech startups is high and the past decade has been littered with high-profile casualties.

In the cloud

So where will the next Meta or Amazon come from? The first wave of successful tech stocks tended to be in the retail or comms sectors. The next significant wave focused on software as a service (SaaS). The HR software company Workday, for example, went public in the US in 2012 and its price-to-sales ratio peaked the following year. Even so, its current share price is 279% higher than it was in 2012.

In the UK, the SaaS market has now matured to the stage where businesses specialising in SaaS advice and digital transformation are the new darlings of the stock market.

One of the hotly tipped tech stocks of the moment is Northern Ireland-based Kainos Group, which provides IT, consulting and software services to the public and private sectors. Cloud technology is also attracting significant interest from investors; one of the best-performing US stocks of 2022 is Citrix Systems, a cloud computing and visual technology company.

Big Four on the tech trail

Accountancy firms are steadily reinventing themselves through technology, using it to add value to their services and automate routine tasks. This strategy has driven a wave of acquisitions of tech companies in recent years.

Cloud technology is an important area of focus for the big accountancy firms, as is artificial intelligence, machine learning, data analytics, and robotics such as drone technology. All these technologies are already being used by Big Four auditors.

The Big Four have focused on partnering with innovators to develop new products and cloud-based solutions. KMPG, for example, has a partnership with Microsoft, and other firms have made a number of strategic acquisitions in recent years: