In this video from Motley Fool Answers, the team addresses the challenge of determining whether a tech stock is overpriced. Why does the sector often command such high valuations? And how do you decide if it's too late to pick up shares of a great company?
A full transcript follows the video.
This video was recorded on June 27, 2017.
Alison Southwick: It's easy to feel like your opportunity has already passed you by with a big tech company, too, especially if you're not super tech savvy and you didn't get in on Amazon (NASDAQ:AMZN) when it was $7. How nervous should I be about that? I bought Amazon maybe five years ago, when I felt like I was getting in too late.
Dylan Lewis: You're sitting pretty.
Southwick: Yeah, actually I'm sitting pretty. And then I bought like a million shares of Berkshire Hathaway, so whatever. I don't even know why I work here anymore.
Lewis: I think one of the important things to realize with tech companies, and why they can command these really high valuations, is because a lot of them are so nimble, and so what they do now might not reflect what they are going to be doing in five years. Or the way that they're making most of their money now might not reflect what it's going to look like in the future.
I think two high-profile examples of that are Netflix and what that business looks like now and what it looked like 10 years ago. I've heard David Gardner talk about how just the name Netflix kind of cues you up to the idea that they were not a DVD-by-mail company. Their name signaled that they were going to be fairly nimble and move as people consume content differently. So there's different iterations of a lot of these businesses.
Then, Amazon's another great example. You brought them up. People have thought about them as an e-commerce company for a really long time, but they have the segment Amazon Web Services, which is infrastructure, hosting, and all of that stuff. That is a cash cow for them and has just been printing money.
People didn't really know how big it was until they started breaking it out a couple of years ago. And since it's really proven to be a great opportunity for them, it will be something that will fuel a lot of growth and give them an opportunity to plow cash back into the business. So with a lot of these companies that have already seen a ton of success, you're seeing that they're not too content with that and they want to keep pushing the limits, and they're investing in all these nascent technologies.
Southwick: Everyone's got a self-driving car that they're working on.
Lewis: The self-driving car. AI. Machine learning. You name it. So they're always investing in new things and their businesses lend themselves very well to bringing those more nascent and emerging tech options into the fold.
Alison Southwick has no position in any of the stocks mentioned. Dylan Lewis owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon, Berkshire Hathaway (B shares), and Netflix. The Motley Fool has a disclosure policy.