Are technology companies the new blue chip shares?
Many large listed technology stocks already meet or exceed the commonly accepted criteria for blue-chip status. With this status traditionally reserved for the likes of banks and utilities, there are good reasons to consider technology companies as the 21st century's version of blue chips.
Technology companies have built a huge global footprint
Not long ago, a company such as Facebook was considered a new and unproven technology company with unknown earnings potential and little revenue. Now over 1.7 billion people around the world are active on it at least every month, and the company reported revenues of $US6.2 billion ($8.2 billion) in the June quarter alone.
The explosive growth of many technology companies is in part driven by the ability to rapidly achieve global scale. For example, Google processes an estimated 2 trillion searches a year globally while Amazon has over 270 million active customers worldwide. Amazon's market value ($475 billion) alone is worth more than the combined market value of Australia's big four banks ($377 billion) and still has a steady growth profile.
From a valuation perspective, it's a myth that all international technology shares are expensive. For example, Alphabet (the parent trading entity of Google) trades at a price-earnings multiple of 20 for 2016-17, which compares with Wesfarmers and Woolworths (at 19). Facebook trades at 24, which is still substantially less than the posterchild ASX-listed blue-chip biotech CSL, which trades at 29. Despite the recent increases in technology share prices, there is still plenty of value to be found.
Technology companies are disrupting traditional blue chips
There isn't one major traditional industry globally that will avoid significant disruption in some way by technology companies.
Alternative energy technologies are advancing at such a rapid rate that, within the decade, we are likely to see solar energy generation on your rooftop providing all your home energy needs. In healthcare, the use of big data technology is already providing immense benefits, from reducing the time for new drug research through to providing better personalised medical treatment.
Technology companies may well be a lower-risk investment compared with traditional blue-chip companies that are in the disruption firing line.
How to invest in technology companies?
The number of ASX-listed large technology companies with a track record of stability, resilience and established earnings is limited. For a broader exposure, you could consider international listed shares. You can now trade international shares directly with many online brokers, or use exchange traded funds or technology-focused managed funds.
With readily available paths to invest in international technology equities, it provides an opportunity to achieve greater portfolio diversification while still holding the 21st century's blue chips.
Get stories like this in our newsletters.