Tech still the way to go

LOOK up the world’s 10 largest companies by market value – Nvidia, Alphabet (Google), Apple, Microsoft, Amazon, Saudi Aramco, Meta Platforms, TSMC, Tesla, Berkshire Hathaway – and a pattern jumps out immediately.

Eight of the 10 companies will likely consider themselves “technology” companies.

The ones who are strictly not – Saudi Aramco and Berkshire – are notable exceptions, but even Berkshire holds significant stakes in technology adjacent businesses. This dominance at the top of these tech companies is not coincidence.

Just think of how each one of its products or services have become the backbone of industries and our daily lives.

The question is thus no longer “do technology stocks matter?” but rather whether it is too late to invest in them.

Investing into the technology sector is often deemed risky by some, but the rewards are equally compelling.

Take the Nasdaq index, which is a technology heavy index listed in the United States. The returns in the past 10 years alone total 480% (dividends reinvested) or 19.2% per annum.

To put that in perspective, an investor who placed RM100,000 into the Nasdaq a decade ago would be sitting on close to RM580,000 today.

Sceptics often argue that after such meteoric returns in the past decade, surely the technology sector is due for a correction with expensive valuations often cited as a risk.

More recently, the sector’s rally was further boosted by all things related to artificial intelligence (AI), with critics pointing to very little profit to show for the enormous sums being channelled into AI-related investments.

But that argument could not be further from the truth.

AI is already generating real returns

Saying technology stocks are in “bubble territory” is akin to saying an entire ocean is on fire because one single ship is burning. When one looks at global technology stocks today, there are many sub-components within it – semiconductors (chip makers), cloud service providers, eCommerce players, software providers and others.

Some are witnessing secular challenges due to AI, some like semiconductors are seeing tremendous benefits. The information technology (IT) sector itself is heterogenous – different in stages of maturity, valuation and earnings growth or quality.

The same argument can be made today of companies related to AI where some are likely to trade at inflated prices while some are real beneficiaries of this trend.

Tech earnings over time

The S&P 500 has witnessed strong earnings growth over the past 10 years. In fact, earnings per share compounded at a rate of 10.4% each year during the past 10 years, or cumulatively, 169%.

Meanwhile, within the S&P 500, the IT sector saw earnings compound at a rate of 15.9%, or 336.3% overall, over the same period.

Perhaps such earnings outperformance of the technology sector is no surprise, given how net profit margins of tech companies have expanded to 29.1% today, up from 25.4% a year ago and versus its five-year average of 25.3%.

It continues to dominate all other sectors (real estate margins are skewed due to accounting effects).

Understanding the risks without being paralysed by them

Of course, risks remain very real. There is a genuine possibility that some data centres built today may run underutilised as technologies evolve faster than anticipated.

Investments in new semiconductor manufacturing lines, initially spurred by widespread shortages across components, could eventually swing into oversupply – a cycle the industry has almost certainly navigated before.

Regulatory scrutiny on big tech firms are also intensifying across multiple jurisdictions, adding another layer of uncertainty.

Yet, all of that is simply part of investing in the technology sector. New technologies replace old ones. Company leadership at the top of market cap rankings changes over time – just look at how Nokia and Blackberry once dominated their respective eras before being displaced.

Creative destruction is not a bug in the technology industry;

it is a defining feature, and it is precisely what keeps driving innovation and new investment opportunities.

The real risk, arguably, is not being too exposed to technology – it is being too cautious.

Investors who sat out the past decade, citing stretched valuations or fears of a repeat of the dot-com bust, largely missed one of the greatest wealth-creation periods in modern financial history.

The takeaway for today’s investor

Global technology is not a narrow bet on a handful of US-listed giants. It encompasses semiconductors in Taiwan, eCommerce platforms across South-East Asia, financial technology disruptors in Europe, and cloud infrastructure spanning every continent.

A well-constructed exposure to global technology provides both diversification and participation in the most dynamic segment of the world economy.

What investors can ill-afford is missing out yet again, paralysed by the fear of past bubbles that may never repeat in the same form.

The technology sector will have its corrections – it always does – but the long-term direction of travel, driven by AI, digitalisation, and the relentless pace of innovation, remains firmly upward.

For investors with an appropriate time horizon, the case for maintaining meaningful exposure to global technology remains as strong as ever.