What to Do When You Just Don't Understand a Tech Stock

Investing in tech stocks can be exciting, but no stock is right for everyone. Sooner or later every investor comes across a company with a story that they just don't get, even if others love the company and the stock is soaring higher. 

Appearing on Motley Fool Live to record the "Industry Focus" podcast, Motley Fool analyst Tim Beyers talks with "Industry Focus" host Dylan Lewis about what he does when he comes across a stock that he doesn't understand.

Dylan Lewis: Tim, I mean, you've been in tech for such a long time, directly and as an analyst. And I'm guessing, at this point, there is not a lot that is going to get past you, but I'm curious --

Tim Beyers: Oh, you'd be surprised. [laughs]

Lewis: [laughs] I'm curious if you still have those moments of, you know, I don't get it, or is this too hard. And like, what do you do when that's what you're, kind of, facing?

Beyers: Well, the beauty of the stock market is that -- I mean, I'm stealing from Warren Buffett here, but you know, you can just keep the bat on your shoulder, man, you do not have to swing at every pitch. And that's the beauty of it. So, if I don't get it, and this happens to me all the time, I don't get it, then I don't swing. And I can give you a clear example of this. You know, when there is a company that is assembled from a lot of different parts, particularly a lot of old tech, like, I am just -- we talked before we came on air, about whether or not I'm superstitious, so I'm not really superstitious, but I'll tell you, I'm really suspicious of a company that rebrands, has a lot of old tech and is layering new tech on top of it. That kind of gives me the heebie-jeebies, and sometimes unfairly so.

Like, I have immediately taken out, and said nope, I don't want any part of that. And I've done that. The most recent time I did that was with Dynatrace (DT 1.60%). So, that ticker is DT. This is a company that does application performance management. So, essentially looking at how your infrastructure is performing; it's a Datadog (DDOG 3.86%) competitor, and I really like Datadog. And so, I have been admittedly dismissive of this company, because it's founded back in, like, 2004. Then was formed and sort of bulked up after purchase in private equity, I believe. There is an older company called Compuware that brought it in and then brought it all together, and then it was a private equity firm came in, a good private equity firm, Thoma Bravo, came, brought it in, put some more money into it. And then spins it out. I'm like, God! I don't know, I don't know, man! This just feels like you're putting a lot of stuff together. And they promised they rebuilt everything from the ground-up, but really, did they? And so, I just got instantly suspicious of it.

But you could argue, if you look since IPO and over the past year, Dynatrace has beaten the market. Now, it's not beaten the market by as many companies that I chose to focus on, but it's still beaten the market. So, that was some unfair, arguably, suspicion on my part. But, yeah, every time that comes up, Dylan, and I'm thinking like, this is too hard, my response is, I'm not touching that one. I may come back to it, but I'm not touching it right now.

Lewis: Yeah, I think complicated leadership history or complicated corporate history, where it's been taken private, brought public again, it's changed hands a couple of times, usually if [laughs] someone likes something, they're going to hold onto it. And so, that's kind of a red flag for me as well.

Beyers: Yes. Yeah, absolutely. So, I have so far been wrong on Dynatrace, and I may prove to be wrong for the duration of this company. Because so far, they are winning, they're doing fine. They get reasonably good ratings from industry analysts like Gartner (IT 1.63%). So, is my skepticism warranted? I haven't gone back and reevaluated, but at least in terms of stock market performance, the answer is no, my skepticism was not warranted so far. Maybe later on I'll be proven right, I don't know.