Technology Company Analysis

The analysis of technology companies is in many ways more complex than other types of publically traded companies.  Many of the metrics applied to typical companies can be deceptive when dealing with technology companies.  This can lead to difficulty in investing in these companies safely.

The primary way in which technology companies differ from other types of companies is that their business approach is often very unusual.  Most technology companies are either in the throes of a meteoric rise or a death spiral.  If the company does not reach "exit velocity" during its rise phase, it will almost certainly return to earth.

Because of this a lot of statistics applied to other companies are misleading.  Unless a technology company is very mature, then a metric like price to earnings ratio might not provide a lot of information.  Because these companies often have amazing growth rates, they often justify much higher price to earnings than other companies.  Similarly they often have huge market shares they have not monetized yet and thus can have a great deal of unrealized potential.

Even once these companies become mature they can be difficult to value.  Microsoft for example long appeared to be an unassailable behemoth.  As the market has changed recently however and the "network has become the computer," its dominance has been significantly compromised.  This provides the capacity even for giants of industry to be subject to dramatic falls.

In many ways technology companies simply move faster than other companies.  Their rise can be dramatic and so can their falls.  It's very difficult to imagine holding many of these companies for decades confidently.  IBM was a technology blue chip for many years but had to completely reinvent itself as a consulting firm to stay relevant and profitable.  The volatility of the technology markets are not for everyone and you should consider carefully before investing in these companies.