Is Tech a Safe Haven Today?

Implications: No segment of the market is completely safe from economic woes, but key tech players are as well positioned as any to weather the storm.  This is the time to choose carefully among investments, but the tech arena today boasts solid investment choices among both large and small companies.  However, due diligence today needs to be “more diligent” than usual!

Analysis: Nobody can predict the future with any accuracy, whether that be Wall Street or Hurricane Ike.  Some people are better at it than others, and some people make large sums of money trying, but at the end it’s all still guessing.    

Given that warning, what is an investor to do today?  One answer, naturally, is to pull money out of the market, put it in dollars or gold, sit on it and wait for the economy to stabilize.  If this does turn into another Great Depression that is undoubtedly the best course, but most would like to believe a better result is possible.  In that scenario, the investor needs to find investments that are most likely to weather the storm and will be best positioned to rebound quickly once things get better.

The tech sector today offers a number of opportunities that are, if not safe havens, at least “safer” havens.  Tech has generally been less touched by the current economic problems, but that cannot continue.  Nonetheless, companies such as Cisco, Oracle and Microsoft currently dominate key market segments and are strong competitors in several other segments.  They also are all sitting on large piles of cash and are less dependent on the credit markets than many.  HP, Dell and IBM are also all powerhouses with buckets of money and market-dominating positions.  In addition, all these companies have been through the fires with the dot-com collapse and emerged leaner and stronger. 

Blue-chip tech companies such as those listed above may see revenues and profits fall, but it’s unlikely they’ll actually start losing money.  Even if they do, all of them have the resources to survive several quarters or even years of losses.  At the same time, they will feed on their weaker competitors, either through direct acquisitions or simply taking market share.  Once the downturn ends they can expect to be in an even more dominant position in their market segment.  An investment in one of these companies is not a sure thing, but it’s about as close as can be achieved.

On the other hand, there are also companies such as Google that must be considered carefully.  Google today is remarkably profitable and clearly dominates the search and online advertising markets.  Yet in terms of revenue they are something of a one-trick pony.  Should the online advertising market fall dramatically, Google would be hurt badly.  That doesn’t mean not to invest in Google, but it does mean such an investment should be carefully thought through.

Many early-stage tech companies are relatively well funded and can expect to do well for another couple of years before needing more capital.  Such companies are certainly a higher risk than the blue chips, yet in many cases that risk is manageable and they may be good investments if their business model is sound.

The tech companies to avoid are those operating on low margins and with minimal cash positions, particularly if their revenue steam is highly variable.  Salesforce.com, for example, has relatively low margins, but their revenue stream is recurring.  They are less vulnerable to downturns than software companies using the traditional licensed model.  If the economy becomes so bad that a third of Salesforce’s customers file bankruptcy they will naturally be hurt badly, but short of that they should be fine.