How to Analyze Technology Stocks

Tech stocks offer the promise of good growth. But they are tricky. Analyzing their idiosyncrasies is vital to understanding them, such as knowing that they fall into two rough classifications. Start by realizing that they can generate unwarranted enthusiasm among investors.

When the general news stations start running financial stories, I get nervous. That usually signals froth in the market, or at least in part of it. We see the initial public offering market, particularly in technology firms, behaving very similarly to that of the tech wreck back in 2000.

Some new issues coming to the market have spotty or no earnings. According to data from the market website SentimenTrader, the percentage of IPOs with negative earnings is hitting levels not seen since near the peak of the technology bubble.

Beyond that, it is tempting to bundle all of technology under one label. But that is a huge mistake.

You can’t weigh each company using the same scale. Oftentimes, technology companies fall into two categories, “old tech” and “new tech.” Examples of old tech are Microsoft (NASDAQ:MSFT), Intel (NASDAQ:INTC), and Cisco Systems (NASDAQ:CSCO). A new tech list includes Netflix (NASDAQ:NFLX), Twitter (NYSE:TWTR), and Facebook (NASDAQ:FB).