In the stock market, the technology sector is among the best performing categories in recent years based on their Return on Investment (ROI). Despite being vulnerable just like other stocks, the category has remained resilient.
Data presented by Buy Shares indicates that sampled top six technology stocks had an average return on investment of 352.23% between September 4th, 2015, and September 4th this year. The research overviewed the ROI of Amazon, Netflix, Microsoft, Apple, Facebook, and Alphabet.
The research shows that returns between the highlighted companies vary greatly. Amazon has been the biggest gainer with a massive ROI of 560.24%. On the other hand, Alphabet had the least ROI of 164.86%.
Return on investment is a key performance indicator used to gauge a business’s profitability over a certain period. It is an important metric for measuring success over time and taking speculation out of making future business and investment decisions.
The technology sector is mainly made up of businesses that sell goods and services in electronics, software, computers, artificial intelligence, and other industries related to information technology (IT). From a broader perspective, the category includes stocks involved in research, creation and distribution of technology-based goods or services.
Why Amazon profitability keeps soaring
The sector has seen emerging trends in artificial intelligence (AI), smartphones, blockchain, self-driving technologies, software-as-a-service (SaaS), and the Internet of Things (IoT). These new trends present new opportunities and also risks for investors.
From the data, Amazon has been the most profitable technology stocks. The stock has soared over the recent years, with 2020 recording one of the highest spikes due to the coronavirus pandemic. The health crisis boosted Amazon’s first-quarter e-commerce revenue.
More people around the world turned to online shopping to limit their exposure to the virus. Additionally, the total number of Prime members has been growing significantly. In January, Amazon announced there were more than 150 million Prime members worldwide while in 2018, the figure stood at 100 million members globally.
In general, the pandemic has had mixed outcomes for the technology sector. Microsoft performed well with the demand for collaboration software, devices, gaming, and cloud computing services as many people were quarantined.
Streaming giant Netflix also witnessed rapid growth in its user base during the pandemic despite the company temporarily pausing production of all shows. However, platforms like Facebook and Alphabet that rely on advertisements might have seen revenues plunge. Some of the biggest advertisers like the travel industry were among the worst hit by the pandemic.
Why technology stocks are very profitable
Several factors have played a key role in high profitability for the sector. For example, the highlighted companies hold extraordinary growth potential. The growth has been a result of the companies innovative drive, leading to new opportunities. Historically, the technology sector has been the perfect ground for innovation. Even big companies like Microsoft still have to innovate to survive in the long-term. However, they have an existing base of products that have become entrenched in the market offering long-term revenue stability.
A majority of the highlighted mature technology companies are mostly valued based on traditional metrics like profit, revenue growth, and overall sales. However, emerging companies are most valued on the potential of sales, hence innovation matters a lot.
Technology companies have held an upper hand when it comes to profitability since their shares have a reputation for looking expensive. The exceptional profitability for most technology companies has led to exceptional cash-flow generation. The cash flow is returned to shareholders in the form of buybacks.
The sector has also been favoured with liquidity. Technology stocks are much more likely to outperform when liquidity is improving. For example, the current era of coronavirus characterized by slow growth and hard-to-quantify growth shocks supports liquidity and by extension tech shares.
Moving into the future, factors like slow economic growth, low inflation, and low-interest rates will positively impact technology companies. However, despite favourable conditions, technology stocks are still vulnerable to a short-term correction. With the recent stock market crash due to the pandemic, the tech stocks remained resilient rallying the rest of the market.
Future investments in technology stocks will likely be driven by emerging trends in the sector. Companies that will put more focus on the cloud, analytics, and digital applications will likely benefit as the trends are taking over.