Tech can be volatile
On the ASX, the tech sector is best represented by the ASX All TechnologyIndex (ASX: XTX), a relatively new index that tracks not just the InformationTechnology sector but also consumer electronics, interactive media andservices, and healthcare technology.You’ve no doubt heard about the spectacular returns that tech shares can bringto a portfolio in good times when we’re in a bull market. But things canchange.As we all know, 2020 was defined by one of the most volatile periods in stockmarket history due to a black swan event that led to a short but extremelysharp bear market.In the throes of the crash, tech shares were hammered far harder than thebroader market. This was largely due to the relatively expensive nature of thesector for investors relying on traditional methods of stock evaluation, suchas the price to earnings ratio.In times of panic, many investors ‘flock to safety’ and move their investmentsto large cap stocks with long standing track records for delivering profits.Technology companies also skew younger than average and many are yet to make aprofit. This makes them susceptible to volatility, especially in unprecedentedtimes or when investors are feeling nervous.Tech shares can often underperform the broader market when there issignificant selling pressure. Investors who are interested in tech sharesshould keep this in mind.However, such falls can be reversed extremely quickly. When we look back atwhat happened immediately after the 2020 market sell-off bottomed in March, wesee a steep recovery for tech stocks with a huge 39% gain in just six monthsfor the ASX All Technology Index.Chart: author’s own. Data source: BetaShares.com.au – as of 17 September 2020This reversal of fortunes for the tech industry was largely due to investorsquickly gaining clarity around which industries could weather the storm of thepandemic. In such a unique time of threat, technology will historically beseen as one of the industries that benefitted from the forced changes in ourday-to-day lives.The technology sector can boom and bust. The same is true of individualcompanies and market segments within the space because it is a rapidlyevolving industry with advancements made in short timeframes.Sometimes, a new technology product or service might appear to be ‘the nextbig thing’ – think 3D television or 3D printing just a few years ago – onlyfor it to fail spectacularly in the marketplace due to a superseder.
This is not an area in which many ASX companies specialise. But US-basedcompanies like Alphabet Inc (NASDAQ: GOOGL) and subsidiary Waymo, Tesla Inc(NASDAQ: TSLA), Uber Technologies Inc (NYSE: UBER), and most major carmanufacturers are working on creating self-driving cars.Some driver-assist technology has already come onto the market and it’spossible that self-driving cabs, and even trucks, will be in limited usereasonably soon.
Computers and software
These are the companies that make the laptops, desktops and tablets as well asthe software that runs them. This segment also includes component players butis dominated by US giants like Intel Corporation (NASDAQ: INTC), which makesthe chips and processors that power computers, along with bigger well-knownbrands like Apple and Microsoft.Xero Limited (ASX: XRO) is a nice contrast. It is a software company thatmarkets its cloud-based accounting solutions in a software-as-a-service (SaaS)subscription model.
Technology is everywhere
You can invest in technology without buying a pure Information Technologysector stock. Technology has bled into nearly all areas of life, so you couldargue that many non-tech companies have morphed into partial-tech stocksbecause so many of them are using technology to grow.For example, Coles Group Ltd (ASX: COL) has a huge retail shopfront presencein Australia, but it is also investing billions into supply chain automationand logistical technology. The supermarket giant is using innovation to lowerits costs and increase its responsiveness to customer needs.ASX blue chip stalwart, Commonwealth Bank of Australia (ASX: CBA) is movinginto the payments space with its new Klarna partnership.Domino’s Pizza Enterprises Ltd. (ASX: DMP) is trialling drone technology todeliver pizzas to its customers faster and more cheaply.
A look at technology ETFs
An exchange traded fund, or ETF, is a fund that invests in multiple shares butis sold like a single share on the ASX.Most ETFs track a certain index, so they provide a way to own an entire marketsector without having to purchase every stock individually.For example, you might buy an ETF of all 200 shares in the S&P/ASX 200 Index,or a smaller ETF tracking biotech companies.Just like a mutual fund, an ETF has an expense ratio, which is the percentageof the fund’s assets used to cover management fees, advertising fees, andadministrative fees. In a broad sense, lower is better but you should look atoverall returns, not just the expense ratio, when considering an ETF.There are several tech ETFs available on the ASX. We’ve already discussedHACK, but other examples include the Morningstar Global Technology ETF (ASX:TECH), which tracks a global basket of large cap tech shares like Netflix andAlphabet.There’s also the BetaShares S&P/ASX Australian Technology ETF (ASX: ATEC),which simply tracks every share in the ASX All Technology Index.The ROBO Global Robotics and Automation ETF (ASX: ROBO) follows a basket of AIand robotics-focused companies.There are lots of choices out there!
Who should invest in technology?
Technology shares offer opportunities for both novice and experiencedinvestors. Companies like Afterpay, Xero, and even smaller players likePushpay offer investors the chance to buy shares in companies whose brandshave become an integral part of their lives.It’s also a space where the average person can jump on an emerging technologythat they have experienced and believe will become part of the future.Technology shares offer opportunities for both growth investors and incomeinvestors, who can choose from several mature, established companies. Ofcourse, this is a sector that’s rapidly developing, so there’s usually somegrowth prospects even in mature companies.Trying to get a clear picture of the value of a technology share can bedifficult. The products and revenue streams can be more complex than aconsumer goods company, for instance, like Woolworths Group Ltd (ASX: WOW),which sells brands and products most of us are familiar with.Companies can also be valued using a number of methods, including earnings-based valuations, revenue-based valuations, cash flow-based valuations,equity-based valuations, and member-based valuations.
Growth investors might like…
Growth investing is buying shares in companies that you expect will grow a lotin the future. You often pay a premium for them but these shares aren’t beingvalued on what the company has already achieved, rather for what it mightachieve going forward. These stocks often receive a lot of analyst attention,sometimes belying the actual size of the company.Of course, getting in early on a stock can bring tremendous returns. Afterpay,for example, priced its initial public offering (IPO) at $1. It’s been avolatile ride since (to say the least) but in February 2021, Afterpay shareshit a peak of just over $160, making this company a ‘160 bagger’ in just 4years.Another interesting case to consider is that of Xero. This company has beenlisted on the ASX since 2012 and has been in full ‘growth’ mode ever since.Only recently has Xero started to turn a profit but investors were willing towait.Between 2012 and early February 2021, the Xero share price rose from about$4.50 to a 52-week high of $157.99. The fact that investors were willing toassign a price-to-earnings (P/E) ratio above 500 to Xero shows their faith inthe company’s growth runway, despite its delayed profitability.This is why you should look at both valuation and market potential whendeciding whether to invest in one of these companies.There’s no single method for doing this but you should consider forwardearnings projections, the earnings growth rate for calculating forward P/Eratio, and the price-to-earnings-to-growth (PEG) ratio.For growing companies, pay attention to free cash flow and debt to get abetter picture of the overall financial health of the business.
Top technology shares
As noted above, there are only a few pure play technology stocks on the ASX.Many companies that are included in the ASX Information Technology sectorcombine technology with other services. For example, Xero is also a servicescompany and Zip Co is also a financial or payments company.Here is a brief summary of some of the big names you are likely to come acrossin your research of ASX technology shares.This company is a member of the ASX tech scene’s hottest club – the WAAAXers.Along with Appen, Altium, Afterpay and Xero, the WAAAX shares have beendescribed as Australia’s answer to the US FAANG group (Facebook, Apple,Amazon, Netflix and Google (whose parent company is Alphabet).WiseTech is a logistics specialist. Its flagship software, CargoWise isdesigned as an ‘all solution’ platform that assists global logisticsoperations like customs and trade.It has been furiously growing both revenues and earnings in recent years (23%and 17% respectively in FY2020), assisted by the company’s aggressive bolt-onacquisitions strategy.As discussed earlier, Altium’s self-titled ‘Altium Designer’ software aims toassist electrical engineers in the design and production of electronic circuitboards.It’s a true cloud-based SaaS company, with use of Altium Designer restrictedto a pay-per-month subscription model over the cloud.This mirrors the successful strategy of US-based Adobe Inc (NASDAQ: ADBE).Altium has already built a decent chunk of market share in this extremelyniche area.Printed circuit boards fuel the modern innovation cycle. Every new electronicdevice designed anywhere in the world will likely require a unique printedcircuit board.All of the ‘trends of the future’ that we have discussed today – AI, self-driving, the Internet of Things and so on – are leaning on printed circuitboards as a foundation upon which to build.This means Altium’s software is an evergreen commodity for the company – andone with virtually limitless potential. That’s why Altium has been one of thebest ASX tech shares to own in recent years, and what makes it one of theASX’s biggest tech stars.Our third WAAAXer share is Appen, the aforementioned dataset provider.Appen produces research and data used for machine learning and AI. The companyis a global leader in the development of these human-annotated datasets, whichother tech companies use to help their machines learn from us humans better.Ever wondered how Apple’s Siri or Microsoft’s Cortana went from barelyunderstanding speech a few years ago to now being able to have a full, semi-normal conversation? Well, it’s partly because of the work Appen does.The trend towards voice-assisted software is undeniable (it seems every devicecan talk to us these days!). It isn’t difficult to conceive of a world whereeverything from your car to your refrigerator can hold a conversation withyou.Appen is known for keeping its list of clients secret, but there are enoughrumours going around to suggest most of the FAANG stocks, like Alphabet andAmazon, have engaged Appen’s services at least once.There is also speculation that Tesla, NVIDIA (NASDAQ:NVDA), Uber and IBM(NYSE:IBM) have also come to the company’s door, too.Afterpay holds the distinction of being one of the most volatile shares on theASX in recent years. In 2020 alone, Afterpay shares were priced at $30, then$40, then back down to $8 during the COVID crash, then back up to $40, then$60, then $80, then around $120 by the end of the year.This momentum continued into 2021, with the Afterpay share price hitting anew, all-time high of $160.05 in February, before falling again. By late June,it was trading at about $122.00. It’s been a wild ride, to say the least.Afterpay is the pioneer of the whole ‘buy-now, pay-later’ concept, which hasturned into one of the greatest ASX success stories in recent times.Many originally thought that, like so many tech pioneers, Afterpay would beovertaken by a new competitor that did what it does, but better. Thosecompetitors have emerged (think Zip and Splitit) but consumers still loveAfterpay and its now powerful brand.It was also assumed that Afterpay would never be able to conquer that breakerof ASX hearts – overseas markets. But the company did just that, rapidlyestablishing expanding beachheads in the US, then Britain.In 2020, Chinese tech giant, Tencent Holdings bought a substantial stake inthe company. This boosted investor confidence in Afterpay to new heights,despite increasing participation in the BNPL market by US giants like PayPal(NASDAQ:PYPL), as well as our own ASX banks.The final WAAAX stock is Xero, another SaaS giant of the ASX, which offersonline accounting software services to small and medium-sized businesses.Xero was born after its founder, Rod Drury noticed how difficult it was forsmall businesses to do their books – and how much of a dreaded task this wasfor owners!At its core, Xero is a New Zealand company, listing in Auckland in 2007 and onthe ASX in 2012. Despite this setback (just kidding, of course), Xero hasbecome an ASX powerhouse.It has been growing its customer base at a truly remarkable speed, posting a26% rise in subscribers (to more than 2.28 million) over the 2020 financialyear.What’s more, these customers are highly sticky. Accounting, payroll and taxplanning are necessities for a business, and if you like the product you’reusing, why stop? It’s Xero’s mission to make sure the process is as painlessand ‘beautiful’ as possible.Xero has a seemingly endless runway in front of it. Many countries are evenpushing to make it mandatory for businesses to manage their bookkeeping andtax obligations through online channels like Xero.Online classifieds giant, Carsales is another Aussie tech company that hascome to dominate its market and is now one of the leading automotiveclassifieds companies in the world.It’s also one of those rare stocks with a name that tells you exactly what thecompany does!The company’s flagship website (you guessed it) carsales.com.au is Australia’slargest car sales marketplace. Customers can buy new or used cars, as well assell their own vehicles in a seamless manner.The company also owns a large range of other online marketplaces, includingboatsales.com.au, trucksales.com.au, bikesales.com.au,constructionsales.com.au, caravancampingsales.com.au andfarmmachinerysales.com.au.This company benefits enormously from its ‘network effect’. As Carsales growsits presence in the market, it attracts more buyers to the site. As Carsalesincreasingly becomes the ‘go to’ marketplace for car sellers to find buyers,they’re more likely to choose Carsales to assist with the sale.We then see a ‘flywheel effect’ as this growth in car supply encourages morebuyers to visit the marketplace, and the network effect compounds.Carsales was one of the first truly successful ASX tech companies. If you’relooking for a tech share with more of a blue chip feel, this is it.
Who is Audinate?
Audinate is a leading provider of professional digital audio networkingtechnology. Its Dante platform allows distribution of uncompressed, multi-channel digital media over a standard ethernet network with near zero latency.This means heavy expensive cabling is no longer required, with existingnetworks sometimes able to be taken advantage of.Audinate’s first-half results showed a 3.8 percentage point increase in grossmargin to 77.1%, driving its gross profit 20% higher over the priorcorresponding period. The company has not yet released an announcement inresponse to COVID-19 but has a strong cash position on its balance sheet tohelp it navigate the turbulent waters.NEXTDC is an S&P/ASX 200 Index (ASX: XJO) company that provides data centreoutsourcing, connectivity services and infrastructure management software.Unlike most ASX shares during March, NEXTDC actually saw its share price rise,posting a 13% gain for the month. After reporting strong half-year results atthe end of February, NEXTDC shares continue to perform well as isolation andsocial distancing measures increase demand for video calls and cloud-basedsoftware.
NEXTDC announced this morning a trading halt for its shares as the companylooks to raise $672 million. With strong growth recently, these funds are tobe used to continue growing the business. It appears management has timed thecapital raise well with its shares sitting at a high. Meanwhile, othercompanies such as Webjet Limited (ASX: WEB) are forced to raise capital atdeflated prices.I think NEXTDC will continue to see a growing demand for its services. Raisingcapital during a time of share price strength is a smart move to capitalise onits growth prospects. Once NEXTDC shares return to trading, I wouldn’t besurprised to see the share price drop closer to the issue price, providing abetter opportunity for investors.
ETFS Morningstar Global Technology ETF (ASX: TECH)
If you believe a particular sector will rebound strongly but are unsure whichcompany to invest in, an ETF can provide great diversification across anindustry.An investment in the ETFS Morningstar Global Technology ETF provides investorswith global exposure to the technology sector. Companies within this ETF arechosen based on Morningstar’s MOAT methodology. This method selects companiesthat are market leaders with distinct competitive advantages. The TECH ETF islargely invested in US tech shares, with smaller investments in Japan,Germany, Switzerland, Israel and France as of April 1, 2020.Top 4 Domain Names For Software And Tech CompaniesFor years (pre-2013) thinking of the best domain name to represent our blog,company, brand, or any site was our only concern. As more of the world movesto the Web and things start to feel a little crowded, we now have more optionsto consider when deciding which domain extension is the best for our site aswell.As the world moves further away from the oversaturated ‘.com’ extension, wesee more companies move towards industry-specific domain extensions —especially in the tech world. This is due to the scarcity of short, uniquedomains for decent prices.Therefore, when starting a tech site, it’s important to know the rightextension to pick. Here we’ll discuss the top tech domain extensions and theiruses.First, when choosing a domain extension, there’s a couple of criteria toconsider: 1. Availability – the odds of domain.com being available are pretty low, but you’re much more likely to score with domain.ly 2. Affordability – even if domain.com was available, it would cost you your first five years of revenue to pay for it, unlike something like domain.ai. 3. Meaningfulness – you need something your users can remember any time, like my.tech. 4. Searchability – let’s be honest, this one is huge because it affects search rankings, which then affect profit. 5. Brandability – in a saturated market, a brand message is important. You need a domain to match that, there’s no way around that.
First Trust NASDAQ Technology Dividend Index Fund (TDIV)
Source: ShutterstockExpense ratio: 0.50%As noted above, Apple recently boosted its dividend. Microsoft has been astout dividend grower in its own right in recent years. In other words, thereare plenty of opportunities for dividend growth investors in the technologysector and the First Trust NASDAQ Technology Dividend Index Fund(NASDAAQ:TDIV) is the tech ETF dedicated to that theme.“Tech giants spent a combined $50 billion on dividends last year. Dividendgrowth was one percentage point higher than the previous year, but smallerthan the acceleration in 2016,” according to Bloomberg.TDIV does not have a dividend growth qualification per say, but the tech ETFrequires components to have a dividend yield of at least 0.50% and to havepaid a dividend over the past year while excluding companies that cut orsuspended payouts. This $999.3 million tech ETF is up nearly 21% year-to-date.