Decoding the tech sector

TECHNOLOGY companies have received much love from investors over the past few years.

Riding on the wave of artificial intelligence (AI) tailwinds and the growing importance of the semiconductor value chain in global markets, their share prices have surged to phenomenal levels across stock exchanges worldwide.

Even in private markets, many technology startups in the space have been able to raise funds at astronomical valuations, even during the so called “funding winter”.

The poster children of the technology sector are none other than frontier AI companies such as OpenAI and Anthropic, both valued at close to a trillion dollars even before their initial public offerings (IPO).

SpaceX which already holds the crown for the highest-valued IPO in history, debuted at a US$2 trillion valuation on “gong” day.

The allure of the sector has always been its ability to provide the most lucrative returns to early investors.

Venture capital (VC) firms, private equity firms and fund management companies that have invested in technology companies would have experienced the sector’s stellar returns.

That being said, never would I have imagined the kind of scale of capital being ploughed into the AI and semiconductor space in the past few years.

Institutional investors and retail investors alike have been bullish, to the extent that sustained periods of losses seem to matter very little compared with profitability metrics.

Take Anthropic’s reported US$1.4 trillion pending IPO valuation as an example.

Despite recording a colossal loss of US$104bil (including an operating loss of US$1.26bil) in the first nine months of 2026 (9M26), the justification appears to be its 1,200% revenue growth to US$33.4bil and its leading position at the forefront of AI innovation.

The same goes for OpenAI, which reportedly recorded a massive loss of US$30.3bil in the 9M26.

Hype machine

In the technology sector, the traditional notion that a company ought to be profitable before it can command a certain valuation has been thrown out of the window.

Prospects and the “promise of growth” take precedence over business fundamentals. This leads to a lot of hype generated around companies in the technology space.

As long as a company or a startup claims to be making grounds in innovation, regardless of whether its offering is truly good or bad, it can command a sky-high valuation as long as enough people believe in it.

This explains why the sector has produced many spectacular failures alongside a small number of runaway successes.

Investment trends also tend to chase the theme of the day. Before the AI disruption, software-as-a-service (SaaS) was one of the hottest areas in technology.

Many VC funds chased SaaS companies that could demonstrate healthy annual recurring revenue (ARR) and command high valuations on the strength of their cash-generating subscription models.

Constellation Software Inc, the Canadian-based vertical market software company founded by venture capitalist Mark Leonard, is a giant in this space.

It has become a textbook example of acquisition-led growth and capital allocation, having acquired more than 850 companies across 100 industries.

Many investors adored the company for its track record of compounding growth and share-price performance, built on its distinctive business model.

Yet, amid fears of AI-driven obsolescence, Constellation’s market capitalisation has fallen from a peak of about US$78bil to around US$55bil.

Investors are increasingly concerned that, despite the company’s healthy ARR and cash flow, AI could enable low-cost software development and displace incumbent players serving various industries.

Companies may even choose to develop their own in-house software, customised to their needs, rather than pay for costly subscriptions.

Valuation premium

When the technology sector has been as hot as it has been over the past two years, many have highlighted the frothiness of the market. These include the likes of Jeremy Grantham, Michael Burry and, at various points, Warren Buffet.

Even hedge fund titan Ken Griffin has called out what he sees as an AI bubble.

I have debated internally about this sector and its apparent contradiction with my understanding of fundamental investing.

I realised that, no matter how hard I try to justify the sector’s valuation premium through PEG (price-to-earnings-to-growth) ratios, scarcity premiums or favourable industry tailwinds, it is difficult to make sense of valuations of 40 to 50 times price-to-earnings, whether or not historical valuation standard deviations are taken into account.

Personally, I would err on the side of caution and avoid chasing these stocks, even if it means missing out on further upside.

The market’s sharp corrections on two occasions, one triggered by the US Federal Reserve’s interest rate hike and another following the Democrats’ landslide victory in the mid-term elections, have shown just how much exuberance may already be priced in.

Symbol of continuous innovation

The only argument against taking a negative view of the technology sector is that technology represents continuous innovation. The advancement of civilisation and mankind is driven by technological progress.

It is difficult to put an exact price on human innovation, and as such, investors are willing to pay a premium to be part of this wave.

Additionally, the returns generated by the sector by far are unmatched across industries.

High barriers to entry, stemming from the depth of technical knowledge required, also make it difficult for new players to enter the market.

For these reasons, technology companies will continue to command a premium, whether we like it or not.

The question, however, is when you enter the market and at what price, as these factors will determine how long you can hold your investment.

Many fortunes have been made and lost during periods of market exuberance. This time is no different.

Survival of the fittest

No doubt, bubbles have emerged in various sectors at different points in history. Even tulips had their day, so what more a disruptive technology like AI?

Being caught in a bubble is dangerous and unnecessary. But the promise of supernormal returns draws investors like moths to a flame.

When the canary sings before the bubble pops, it is a sign to get out. While I do not know when it will happen, my observation is that there have been many warning signs throughout 2026.

That said, in every major meltdown or market crash, there will definitely be survivors among the ruins.

These survivors will likely end up as dominant forces. Finding the survivors that eventually become winners is the hardest task of all.

Nobody wants to miss out on the next Google, Apple, Microsoft, Meta, Amazon, Nvidia and others.

Berkshire Hathaway has shown, however, that you do not have to be the earliest mover.

When Buffet decided to invest in Apple in a big way, it was much later, in the first quarter of 2016. For context, Apple had launched the iPhone 7 that year.

The returns have been astounding, with more than US$100bil in pre-tax profits and a return of around five times its initial investment.

This clearly shows that a good investment does not necessarily mean you have to swing in the first inning. You can take your time and swing only when you are ready.

The same goes for investing in technology companies. Not being the earliest isn’t fatal. But being the last is definitely lethal.