More so than in most other industries, much of the value of a high-tech company can be found in the knowledge, creativity, or intellectual property belonging to the driving forces behind the company. To become and remain successful, tech-companies must continue to innovate and in the process effectively out-anticipate or out-smart the competition. To do this, they must hire the best people or they will inevitably fall behind. Therefore, we strongly suggest that whenever you are considering placing any of your hard earned bucks into one of these high-tech companies, you contact them first and inquire as to the background of the top management.
In an industry ripe with uncertainty, tech-companies which service other tech-firms or the technological needs of any other company tend to be a safer bet, relatively speaking. Companies such as Sun Microsystems, Cisco, and Oracle help make up the backbone of the Internet and service large multinational firms in a diverse range of technological functions. When compared to strictly Internet-based corporations and software development companies, their revenues and earnings, although growing, tend to be less erratic. Service companies are able to produce revenue streams faster and become profitable sooner than other tech-based companies. As a result, one is able to conduct a quasi-fundamental analysis on them with a higher degree of success. However, investors should not confine themselves solely to these large-cap high-tech service companies. In fact, diversification throughout the tech sector is important.
Search for companies that currently have or are continually developing products or services which are considered "best-in-class". By this we mean products which are market leaders and thought to be on the cutting edge of the industry. Indeed, if you find a company's products are consistently recommended in respected tech-magazines or journals, chances are you may have a potential winner on your hands.
After you have taken a look at management, the industry, and the company's products it is time to step back and evaluate whether or not there is a viable market for the product. Of course, a company may have developed a "best-in-class" software program that revolutionizes the identification process of the rare African Dung Beetle, yet the practical market place is so minute that profitability is clearly impossible. Try to identify tech-companies which service or sell products to relatively substantial, growing markets.
Developed by the editors of a respected financial advisory, The FutureStock Review, it operates on the same premise as a P/E ratio, with one addition. They add the research and development costs a company incurs per share outstanding to the EPS figure in the denominator. This modification is performed to account for the fact that, in order to continue to grow, a healthy tech-company will often spend over 20% of its revenues on R&D, thus reducing earnings. This reinvestment in the company usually increases the value of the firm, however its impact is neglected in the conventional P/E ratio, which was originally designed to value low R&D industrial firms. The standard rule-of-thumb states that a ratio of 10 or below is preferred.
Current Share Price
(EPS + Research & Development per share)
Remember these are only benchmarks, each company should be evaluated on an individual basis.
"A ratio of 10 or below is preferred"