How To Analyze Tech Stocks: 7 Factors That Must Be Considered
There are a number of measures that are especially pertinent to tech stocks. Do you know what they are and how to interpret them?
Earnings season is in full swing. This post will attempt to provide a few guidelines for drawing your own conclusions when reading tech stock results. This is not to say that standard measures of revenue and income are not important; they are. The point of this post is that there are areas to examine that will allow you obtain a deeper understanding of a tech company's results. And hopefully, will allow you to do a better job trading tech stocks.
The seven factors to consider --
- Year-over-year comparisons versus sequential quarterly results: It is important to always examine y-o-y revenue and earnings. It may not be obvious that tech sales have a seasonal component but they do. Enterprise software companies, for example, are affected by the budgeting cycles of large corporations which are generally on an annual calendar-based cycle with projects often ramping up as the new year begins and budgets are defined. Hardware component companies that are players in consumer electronics often have bigger sales in the summer and fall as they supply parts to the companies that are focused on building products for the holiday selling season. This is why we have recently heard some of the semiconductor companies like Intel ( ) and SanDisk ( ) talking about a "return to seasonal trends".
- Gross Margin: theoretically, this term is not really specific to tech companies as any company can be evaluated on this metric. Simply put, Gross profit margin = (Revenue - Cost of Goods Sold) divided by Revenue. Investors track this carefully for tech stocks because it provides a quick way of identifying if costs are under control. There are two more factors that play into this analysis: scale and factory or fab utilization. Usually, when production systems are more fully utilized, cost per unit is reduced which helps to reduce the overall cost of goods sold (COGS). Similarly, efficiencies of scale will tend to drive down unit costs. When you are looking at hardware companies that are cranking out electronic components, unit costs can be a huge driver for overall profitability.
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