How can investors find good tech stocks? Here are 4 useful indications

Finding good tech stocks that can generate returns similar to what the FAANG stocks did in the 2010s is every investors dream. But it is a lot more difficult in the post-COVID era. Plenty of companies that have promised much delivered little, but the companies that have done the best have come out of nowhere and made spectacular gains.

So, how can you find good tech stocks before everyone else does? Here are 4 useful characteristics, or traits, that good tech stocks have.

 

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4 traits of good tech stocks

 

 

1. Are profitable (or close to it)

In the 2010s, this was not necessarily a requirement. But now it is. Record low interest rates meant that tech stocks were valued higher and could access cheaper finance. Interest rates rising have sent their valuations falling and funding options dried up – at least for those that need funding to survive.

However, there are plenty of tech stocks that don’t need investor capital to survive and are self-sustainable from their own cash flows. There are tech stocks such as Objective Corporation (ASX:OCL) that haven’t raised capital in several years.

 

2. Are at the forefront of markets set to undergo substantial long-term growth

We all know that ‘Tech’ is on the rise. But the tech stocks are at the forefront of specific trends, such as the growth in spending on professional IT services. Gartner and Frost & Sullivan estimated that enterprise IT spending amounted to US$4.1 trillion in 2021 and will hit US$4.5 trillion in 2022. In Australia, 2021 spending amounted to A$103bn, $37bn of which was for IT services. Companies in this space include Atturra (ASX:ATA) and Cirrus Networks (ASX:CNW).

Another example is the migration to the Cloud – a process that Goldman Sachs estimated last year is only 20% complete. One company with exposure to this space is ReadyTech (ASX: RDY) that provides SaaS technology in Australia to Education, Workforce Solutions and Government clients.

One final trend is digitisation of the Automotive space. Infomedia (ASX:IFM) is a company with exposure here. It provides cloud-based parts and service software to the global automobile industry. IFM is also a former Concierge stock that generated a return for us of more than 34% in just over 3 months.

 

3. Have good management

This can either be a founder or an experienced tech executive. We like to see management with significant skin in the game (in other words a good shareholding) and courage to make long-term decisions in the best interests of the company. They will see trends emerging and pounce on them before their competitors do and guard their company’s market share vigorously.

 

4. Building (or defending) significant market share

We like to see companies with a big market share, enabling them to capture the bulk of the gains in a particular sector. To build market share is difficult enough – or at least doing so without competitors noticing. To retain it can be just as difficult as younger companies will challenge your ground all the time.

In our view, there is no better company that has build and defended a market share better than Xero (ASX:XRO). It began as an accounting software platform at a time when accounting was mostly done outside the Cloud. As it built a market share, it expanded its offerings beyond book-keeping to things such as storing files, converting currencies, keeping track of inventories and creating professional quotes. As a consequence, there’s literally no incentive for firms to ditch Xero for a competitor and it is much more difficult for Xero to be challenged.

 

Finding good tech stocks is difficult, but not impossible

Finding the best tech stocks is a difficult task. It’s important to do your research and choose companies with strong financials, a strong market and management that can capitalise. Considering these factors, there are plenty of promising opportunities for investors in the tech industry. And Stocks Down Under can help!

 

Stocks Down Under Concierge is here to help you pick winning stocks!

The team at Stocks Down Under have been in the markets since the mid-90s and we have gone through many ups and downs. We have written about every sector, including Technology!

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