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Investing In Tech Giants

Posted on | July 18, 2011 | Comments Off

The technology sector is the shining star of the American economy.  As manufacturing ships jobs overseas and iconic American brands like General Motors become reduced to government / union wastelands, the U.S. tech sector continues to lead the world in a myriad of ways.

The technology of titans in America such as Microsoft (MSFT), Google (GOOG), Amazon (AMZN) and Apple (AAPL) are being joined by the next crop of tech darlings like Netflix (NFLX) and the social media stars like Facebook, LinkedIn (LNKD), Twitter and Groupon.

It is tough to discern the lasting economic impact that the new crop of tech companies will bring. Google has brought unprecedented knowledge to every person on the planet at the stroke of a keyboard. Microsoft increased productivity dramatically through its hallmark Office software. Apple has revolutionized the way media is distributed and consumed.

Facebook has changed how we interact with friends. Does this bring real economic benefit or just social benefit? Netflix has made it possible to watch movies easier without having to drive to a Blockbuster, but again where it the lasting economic benefit?

When investing in tech giants, we have a number of questions we need to ask:

  1. Is the company too reliable on a single product or service? Technology changes so rapidly that a dominant product can quickly become irrelevant. Investing in companies that dominate a single area of life might be risky. This list could definitely include Netflix (watching movies and TV) and Google (internet search).
  2. How long lasting is the competitive advantage and market share dominance likely to remain? Facebook, Microsoft and Google seem to have very large moats when it comes to their primary markets. Facebook dominates the social web. Google dominates search. Microsoft dominates enterprise PC software. I like Facebook here because I think they have a unique dominant position and it’ll be tough to break their hold over individuals - and I think individuals are unlikely to value more than one social network like Facebook.  Microsoft is in a good place because businesses will move slower than individual consumers.  Businesses are trying to make money and don’t want to have to worry about software. They just want it to work. As such, Windows and Office are likely to make massive profits for a long time to come.  I worry about Google since they are at risk of losing market position due to any number of unforeseen changes to how the internet works. The rise of Facebook is a good example of this.
  3. Does the company pay a dividend? Will it keep growing? Tech companies are notorious for dividend investors.  They board tons of cash and rarely pay it out to investors until they become slow moving giants that are mostly unattractive to investors - see Cisco (CSCO).  Microsoft is one of the few companies I see on the market that represents a growing dividend and future growth in technology.


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