The technology sector is one of the most exciting sectors of the stock market. Tech companies are on the cutting edge of innovation and opportunity. It also helps that in tech, unlike in almost any other industry, massive fortunes can be made in a relatively short period of time.
The thrill of finding the next Microsoft or Apple before it takes off attracts many to tech shares, but investing in tech also has a downside.
Technology may be the most innovative sector, but that also makes it one of the most competitive. For the economy competition helps increase growth and productivity, but in the stock market, competition doesn’t always turn out well for the incumbents. In fact, according to a study by J.P. Morgan, from 1980-2014, the tech sector had the highest rate of catastrophic loss of any sector. JP Morgan defined catastrophic loss as a 70% decline from peak value with minimal recovery.
The Wall Street Journal provides a timely real world example to go with those numbers.
Slack Technologies Inc. built up a $3.8 billion valuation and buzz as one of Silicon Valley’s hottest startups by getting millions of office workers to use its group messaging app. Now some of the tech industry’s biggest players want to be part of the conversation.
Microsoft Corp.’s this month unveiled its Teams workplace collaboration service, which came on the heels of Facebook Inc.’s launch last month of Workplace by Facebook. The tech giants’ moves put pressure on the San Francisco startup, whose user base is tiny by comparison.
“I’ve been paranoid about this for a long time,” Slack Chief Executive Stewart Butterfield said in an interview after the Microsoft Teams announcement….
Microsoft, the long-reigning king of office software, and Facebook, with 1.79 billion monthly users for its social network, bring new heft to the fight. Microsoft Teams, due to become generally available in early 2017, also lets workers chat with far-flung teammates and search through conversations. It is designed to work with Microsoft productivity apps so, for instance, users can embed Skype video conversations in the message queue. Microsoft said it would include Teams free with the commercial version of the online Office 365 productivity suite, which claims 85 million users.
There are no real winners here. Microsoft is adding a new product with all of its associated costs for free while Slack is likely to lose market share and have to offer discounts to existing clients.
Despite all the hype and glamour of the sector you read about in the press, savvy investors approach tech with caution as we do for our managed accounts at Richard C. Young & Co., Ltd and in our monthly strategy reports.
Jeremy Jones, CFA
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