Tech Stocks Gain 47.6% in 2020, Drop 33% by 2022

During the COVID-19 pandemic, technology played a crucial role in helping societies adapt to an unprecedented situation. As lockdowns and social distancing measures became the norm, greater interconnectivity became essential. This shift helped maintain continuity in various aspects of life and fuelled significant growth in the tech sector. The tech-heavy Nasdaq-100 index reflected this trend by delivering a remarkable 47.6% gain in 2020. The momentum carried into 2021, with hefty gains continuing to boost the index.

However, the post-pandemic period introduced new challenges. The onset of Russia’s invasion of Ukraine, soaring inflation rates, and the rapid tightening of monetary policy created a volatile environment. Investors, in response, transitioned from Growth to Value stocks, leading to a 33% decline in the Nasdaq-100 by the end of 2022.

The Resilience Of Tech Stocks

Despite the downturn, tech stocks are now positioned more compellingly than before. The core drivers of long-term growth remain intact, and current valuations are more attractive. This re-rating provides a unique opportunity for investors as technology continues to evolve and address larger markets than initially anticipated. Today, tech firms extend beyond merely selling hardware and software; they offer services that generate steady income streams.

For instance, Amazon, which began as an online bookseller, has diversified remarkably, acquiring MGM Studios for $8.45 billion. Alphabet, known as Google, continues to innovate and expand like a start-up, even after going public in 2004. The tech landscape has evolved beyond traditional boundaries, underscoring the sector’s dynamic nature.

The Power Of Cloud Computing

A significant driver of this evolution is cloud computing. The IDC reports that spending on cloud infrastructure products surged by 24.7% year-on-year in the third quarter of 2022, reaching $23.9 billion. For the entire year of 2022, IDC forecasts a 19.6% increase in cloud infrastructure spending, totalling $88.1 billion. This growth is propelled by high demand and improvements in the infrastructure supply chain.

IDC predicts a compound annual growth rate of 12.9% for cloud infrastructure spending from 2021 to 2026, reaching $135.1 billion by 2026. This expansion enables new business models to scale rapidly. Technology firms leverage cloud computing to offer subscription services like Amazon Music, Microsoft Xbox Live, Apple TV, and Google Play, which provide consistent revenue streams.

Digital Transformation: A Paradigm Shift

Digital transformation is reshaping businesses across industries. This process involves embedding technology to enhance efficiency, drive business dynamics, and adopt a digital-first mindset. Companies that successfully navigate this transformation can better compete with digital-native businesses.

The impact of digital transformation is evident in various sectors. For instance, mobile banking apps have become essential for attracting the next generation of customers in retail banking. Similarly, governments worldwide are adopting digital self-service processes for diverse tasks, improving service delivery and accessibility.

Best-Value Tech Stocks For The Future

Value investing is a strategy where investors seek out stocks that are trading below their intrinsic value, expecting the market to correct this mispricing eventually. This approach typically involves fundamental metrics like the price-to-earnings (P/E) ratio, where a lower P/E ratio indicates undervaluation. These stocks have the potential to provide substantial returns once the market realigns their value.

SurgePays, Inc.

SurgePays, Inc. is a technology company that provides financial and prepaid wireless services to underbanked communities through over 8,000 convenience stores in the U.S. In the first quarter of 2024, the company significantly shifted its business model, moving away from lead generation to focus on expanding its nationwide network.

Hello Group, Inc.

Hello Group operates in China’s online social and entertainment sector with platforms like Momo and Tantan. Momo facilitates location-based social interactions, while Tantan focuses on dating and romantic connections. These platforms enable users to form new relationships, expand social circles, and engage in leisure activities.

iHuman, Inc.

iHuman Inc. provides tech-driven intellectual development products, original content, and advanced technologies such as artificial intelligence and augmented reality. In fiscal year 2023, iHuman experienced a 16% yearly increase in average monthly active users. Notable achievements include the international success of the Aha World app and the strategic acquisition of intellectual property related to Cosmicrew, a popular cartoon series.

Growth investors seek companies demonstrating substantial revenue and earnings per share (EPS) increases, considering these metrics as signs of a robust business with value appreciation potential. However, focusing solely on these metrics can result in an incomplete evaluation of a company’s growth potential. Various external factors, such as changes in tax laws, mergers, or one-off gains, can distort these figures when considered alone.

A dual-metric approach is frequently used to achieve a more balanced evaluation of growth companies. This method provides a comprehensive view of a company’s growth potential by examining multiple performance aspects. Moreover, companies with quarterly growth rates exceeding 1,000% are typically excluded from the analysis as outliers to avoid skewing the overall results. This approach ensures a more accurate representation of sustainable growth among tech stocks.

TeraWulf Inc.

TeraWulf Inc. is a vertically integrated Bitcoin mining company operating two facilities in New York and Pennsylvania. Its integrated approach allows for greater operational control and potential cost efficiencies, which are crucial in the volatile cryptocurrency mining sector. In April, TeraWulf reported mining 348 bitcoins, averaging 11.6 bitcoins per day. This represented a 5% decrease from March’s production rate, highlighting the inherent challenges in maintaining steady output amid fluctuating market conditions and operational obstacles.

Hut 8 Corp.

Hut 8 Corp. is another prominent player in Bitcoin mining. The company mines Bitcoin and offers mining hosting, data centre services, and infrastructure development. This diversification enables Hut 8 to tap into multiple revenue streams, thereby reducing some of the risks associated with the highly volatile nature of cryptocurrency prices.

EHang Holdings Limited

EHang Holdings Limited is a leader in urban air mobility technology, dedicated to providing safe and eco-friendly air mobility solutions. The company develops unmanned aerial vehicle (UAV) systems for a variety of applications, including passenger transportation, logistics, smart city management, and aerial media solutions.

High-Momentum Tech Stocks

Momentum investing leverages existing market trends by concentrating on stocks that have outperformed their peers or the broader market in terms of returns. This investment approach is based on the belief that stocks on an upward trajectory will continue to excel, provided that the fundamental aspects of their business, industry, or sector remain unchanged.

This strategy is frequently applied to tech stocks, which often undergo significant market disruptions. As companies introduce new products, announce technological advancements, and rapidly gain popularity, investors can potentially benefit by investing in these stocks during their ascent.

Alarum Technologies Ltd.

Alarum Technologies Ltd. offers global internet access and web data collection solutions through its enterprise branch, NetNut. Their proxy network allows clients to collect data at scale from any public web source anonymously. This capability is increasingly valuable in today’s data-driven decision-making environment.

Exodus Movement Inc.

Exodus Movement, Inc. provides a multi-asset software wallet designed to make cryptocurrencies and digital assets accessible and user-friendly across desktop, mobile, and browser platforms. The platform enables users to manage and exchange over 10,000 asset pairs securely, giving them complete control over their wealth.

MoneyLion, Inc.

MoneyLion, Inc. provides a “super app” for consumers and an embedded finance platform for enterprises, offering personalized financial products, content, and marketing technology. This comprehensive approach allows MoneyLion to address various financial needs, establishing it as a versatile entity in the fintech sector.

Growth Potential

Tech stocks, particularly those in emerging areas, are renowned for experiencing some of the sharpest growth of any publicly traded company. Investors often seek opportunities during periods of underperformance in the sector, anticipating significant long-term growth. This approach hinges on the belief that the tech sector will continue to innovate and expand, driving substantial returns for those who invest early.

However, growth among tech stocks can vary dramatically. Many of the larger firms, such as Amazon.com Inc. (AMZN), Meta Platforms Inc. (META), and Alphabet Inc. (GOOGL), continue to exhibit impressive growth rates despite their massive market capitalisation and extensive market saturation. These tech giants have proven their ability to innovate and dominate their respective markets, ensuring continued growth.

In contrast, small-cap or penny tech stocks often present higher growth potential due to their lower market valuations and the possibility of significant technological breakthroughs. These companies, while riskier, can experience explosive growth if they achieve a technological innovation or suddenly gain popularity. Thus, the tech sector offers a unique blend of high-growth opportunities across both established giants and emerging small-cap companies.

Advanced Innovation

The tech industry is synonymous with innovation. Companies in this sector continuously strive to capitalise on the latest technological advancements and guide future developments. This relentless pursuit of innovation primes the tech sector for frequent breakthroughs, ensuring a dynamic and ever-evolving landscape.

One of the most transformative trends in recent years has been the rise of AI-related technologies. AI is increasingly being integrated into various industries and sectors, enhancing efficiency and productivity and creating new business models. Tech companies that play a pivotal role in developing and implementing AI technologies stand to benefit immensely from this ongoing trend. Their ability to stay at the forefront of such technological advancements positions them for sustained growth and market leadership.

Drawbacks of Tech Stocks

Volatility in the Tech Sector

Despite their attractive growth potential, tech stocks are infamous for their high volatility. Rapid technological advancements and intense competitive pressures can cause significant price swings. These stocks often have high valuations based on growth expectations, making them particularly vulnerable to market corrections if these expectations are not met.

Moreover, the tech sector encounters distinct regulatory challenges and geopolitical tensions that introduce additional risks. Governments globally are increasingly scrutinising tech companies over data privacy, antitrust concerns, and national security issues. These regulatory pressures can create uncertainties and potential disruptions, affecting tech stock performance.

Rapid Shifts in Trends

The quick pace of innovation in the tech sector means that trends and market prospects can change quickly. This dynamic environment can be challenging for investors, especially those who are not well-versed in the underlying technologies. The rapid gains of many tech firms can lure investors, but without a deep understanding of the sector, they might end up chasing trends that have already peaked.

Investors lacking knowledge of various tech companies’ fundamental strengths and weaknesses may struggle to keep up with rapid changes. This can lead to poor investment decisions and potential losses as trends evolve and new technologies emerge. To navigate this fast-paced sector successfully, investors need to stay informed about technological advancements and market dynamics, ensuring they make well-timed and informed investment choices.

The pandemic-induced shift towards greater interconnectivity has permanently altered the technological landscape. Although recent economic challenges have impacted the market, the fundamentals supporting tech stocks remain strong. Technological advancements, particularly in areas like cloud computing and digital transformation, present compelling opportunities for investors. By focusing on value investing and identifying promising tech stocks, investors can capitalise on the long-term growth prospects of this dynamic sector.