The Motley Fool

Does a Tech Stock Bubble Exist?

The internet, marijuana, radio, aviation. All of these industries have one thing in common: they were a stock market bubble. It has many thinking that right now, the tech industry is in the same situation. But is it?

Frankly, I wouldn’t be writing about this case if I thought there was a bubble, and I’m here to burst your thoughts on that.

Of course there are similarities, don’t get me wrong. Investors don’t have to look far to see overvalued stocks left and right in this industry. But while these stocks may see some drops in share price, there shouldn’t be a burst like what we’ve seen in the past.

Better business model

While the industries of both marijuana and even dot-com in the 1990s were new and exciting, the technology industry doesn’t really have that same excitement to deal with. And that’s a good thing.

Companies like Shopify Inc. (TSX:SHOP)(NYSE:SHOP) aren’t speculative, they’re advanced. They might be coming up with new products or processes that change the face of the technology industry, but they aren’t a completely new concept like the cannabis industry, making it up as they go along.

Basically, there’s little question that these companies will continue to generate revenue — and eventually profit — for years to come as long as their business remains stable. But that’s the thing: they rely on the business, not the industry. The technology industry is here to stay, plain and simple.

Unfashionable

While there are certain stocks that are trendy in this industry, like Shopify, it’s not the industry as a whole that’s creating a trendy topic for analyst discussion. Investors seem much more interested in when and how to invest in cannabis rather than tech, and are looking at it with a much calmer attitude.

Take Kinaxis (TSX:KXS). While there hasn’t been any imposing excitement that this stock is set to double in the next few years, there is definitely room for growth as there has been since its IPO in 2014. The company has been on a steady rise since then, with only a few dips along the way. And that’s the key: a few dips, not leaps and valleys.

While a stock like Kinaxis is likely to see further leaps and a few dips in the next few years as its projects come online, investors don’t have to necessarily worry that excitement around this stock is going to suddenly go away. It’s far more stable than that.

Price point

It’s only half a year since the legalization of marijuana, and investors saw stocks soar into the stratosphere in a short period of time, only to fall after legalization. The same is true when it comes to dot-com. The price point of these companies suddenly skyrocketed, only to come crashing back down.

If you look at the technology sector as a whole, that immense rise just isn’t there. Of course there’s a stock like Constellation Software Inc. (TSX:CSU), but that’s a small part of a large industry. In fact, while the stock may have climbed an incredibly long way since its IPO in 2007, it has since stabilized around $1,200 per share, where analysts expect it to remain over the next 12 months, which also means that it’s had about a decade of steady climbing on top of its other technology peers.

Foolish takeaway

While the tech industry can be an exciting one, it’s a lot more stable that investors give it credit for. At the heart of this sector is that these are all businesses providing needed services for a world that’s becoming increasingly dependent on technology for survival.

Shopify is offering a simpler solution to online commerce. Kinaxis is providing a simpler way of analyzing data and supply management. Constellation identifies specific software companies to acquire that have enormous growth potential. All of this shows how technology is now about finding simple solutions in an industry that might be growing, but is here to stay.

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Fool contributor Amy Legate-Wolfe has no position in any of the stocks mentioned. The Motley Fool owns shares of Shopify and Shopify. Shopify and Kinaxis are recommendations of Stock Advisor Canada.

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