Technological development has always been rapid, but during the corona crisis the pace of development accelerated to the speed of light. A digital leap spanning several years was taken in a few months.
It is difficult to predict which companies are headed toward the cemetery for technology companies
The journey from the top to the bottom can be really fast. The example known by all Finns is Nokia’s* collapse from the king of mobile phones to a crisis company within a few years. It is good for the investor to remember that the stock price usually predicts the company’s collapse and falls much earlier and faster than the turnover and profit.
International investors feel that Nokia is still in the cemetery. Nokia has had problems with the 5G business ramp-up. Development has been slower than expected. The stock has been on a long-term downtrend since 2007. Nokia must show positive revenue and profit development over many years and technology leadership in its own field for it to be on a long-lasting upward trend.
The other example IBM* has struggled for years. IBM has legacy businesses with declining revenue. As a result, the company's total turnover has not increased at all in 2021, even though the comparison year is a weak COVID-19 year. The problems are not only in legacy businesses but also in new growth sectors. In the last quarter, the company's cloud business grew a meager three percent. It is a poor performance, while at the same time the cloud sector giants Amazon, Microsoft and Google are growing at a tens of percent rate.
IBM stock is at a lower level than it was five years ago
Intel* has been one of the world’s leading technology companies for a long time, but its dominance in processors has begun to falter. AMD* has challenged Intel especially in the fast-growing gaming and data center processor markets. Nvidia* correspondingly in GPUs. AMD has also made an offer to buy Xilinx, and AMD will only strengthen with the acquisition, which means the competition is tightening up.
Neither is Intel a crisis company - it is very profitable. But latest earnings reports have shown that company's problems are not solved in months but in years. The stock is at the same level where it was three years ago. At the same time, AMD’s stock has produced returns of 1000%.
Technological progress is the most important megatrend
The best technology companies are the world’s most valuable companies. This is why competition in the technology field is fiercer than in other fields. If a company does not stay at the forefront of development, it is headed toward the cemetery for technology companies.
When you invest in technology companies, pay attention to at least the following matters:
- There are many examples in history of technology companies that have been at the forefront of development but fallen off the pace of development and ended up in the cemetery.
- The stock price reacts to falling behind in development in advance and faster than the company’s business activities. The stock may find itself in the cemetery when the business activities are only on the way there.
- The relative return compared with the best technology companies makes for even more miserable reading
- A slow decline is also bad, because the stock’s price development is on a downward trend for years. The relative return compared to the Nasdaq 100 index is again very poor.
- The investor should invest diversely in technology companies
- The portfolio should concentrate on the best technology stocks
- A company can rise up from the cemetery, but it’s very rare. One example is the world’s most valuable company Apple*, which has been in the cemetery twice but is now stronger than ever.
- You can invest in these kinds of Phoenix birds when they have 4-6 quarters of increasing revenue and improved profits behind them. It indicates a successful turnaround.
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