Technology Industry Report
Major Sectors
Although the technology industry is made up of a number of different sectors, including
Computer Hardware, Networks, Peripherals and Storage Devices, perhaps the three most important
ones are Telecommunications, Semiconductors, and Software and Internet Services.
The Telecommunications industry, characterized by giants such as Nokia, Qualcomm,
AT&T, Verizon, and SBC Communications, has, over the past decade, been transformed by rapid
de-regulation and innovation into becoming an increasingly text and image-based—and decreasingly
voice-based—medium of communication. With the introduction of DSL, the main broadband
telecom technology, the industry is quickly spreading its influence over an ever expanding audience.
Because of the expensive nature of the telecom services industry, and the need for companies to
own expensive networks, the sector is for the most part dominated by a few large players, which
have little or no earnings to speak of. The large capital requirement is inarguably the largest barrier
to entry into the industry, and a constant cash flow is required to cover the large fixed costs of
operation. Undeniably, competition among companies in the telecommunications industry is
cutthroat, which tends to drive profitability down. Meanwhile, the communications equipment
industry, dominated by Nokia and Qualcomm, continues to innovate and grow as consumers
demand increasingly powerful bundled applications.
The semiconductor sector, like telecommunications, has for the most part been dominated
in the past by a few major giants. Intel alone has command over approximately 80% of the PC
microprocessor market, but now AMD is encroaching upon Intel’s market share. Dell, for example,
now carries AMD rather than Intel chips. Competition in the industry is also high, as the pressure is
always on to come up with the next fastest, smallest, cheapest, and best chip. In the past,
semiconductor companies oversaw the entire production process, from research and development
to manufacturing. Increasingly, however, many chipmakers are now outsourcing production
responsibilities to foundry companies, but the barriers of entry are still high.
Lastly, the internet portal industry has been one that has undergone dramatic transformation
in the past few years. Dominated by players such as Google, Yahoo, and Amazon, the sector is
comprised of companies that provide anything from web search engines to Information Technology
services. In recent years, the biggest challenge to these companies has been coming up with a way to
keep up profits, while at the same time, avoiding the loss of customers because of a failure to
provide free services. Advertising has provided somewhat of a solution, as the big internet portals
are increasingly generating more and more revenue from it. Unlike the telecommunications and
semiconductor sectors, the internet portal industry has experienced rapidly falling costs of entry.
However, the combined effect of weak barriers to entry, the presence of multiple substitutes, and
increasing buyer power has not only driven down profits, but has also made the internet portal
industry into one of the more fiercely competitive.
Valuation metrics
The key to valuation is finding a common ground between the companies. By examining the
income statement, the following factors can contribute to finding characteristics for comparison of
companies. The technology sector can be divided into three main sectors: telecommunications,
internet, and semiconductor.
The telecommunications industry is comprised of hundreds of players, providing network
connectivity to people. Because earnings for telecom companies are usually little to none, analysts
must look at other factors on the income statement other than the Price-Earning (P/E) ratio. Since
the P/E is only meaningful when Earnings per Share (EPS) is positive. The Price/Sales is often
used, taking the market capitalization of a company and dividing it by its sales in the past 12 months.
A lower ratio is optimal. Another common valuation metric is the Earning Before Interest, Tax,
Depreciation and Amortization or EBITDA, which weighs the profit performance and operating
results with the large capital expenses. This allows analysts and investors to see whether the
company is profitable on a regular bases when stripped of interest, taxes, and capital expenses.
EBITDA is calculated as revenue minus expenses (excluding tax, interest, depreciation and
amortization). Many companies spend a large amount on infrastructure and EBITDA tells whether
the new fiber optic network is making or losing money. EV/EBITDA where EV is the Enterprise
Value has also become popular as a technology industry measurement. Its main advantage over the
P/E ratio is that it is unaffected by a company's debts and equities by comparing the value of a
business, free of debt, to earnings before interest. Analysts also look at cash flow to see how much
money is actually flowing through the telecom operator at a given time, whether the company is
taking loans and covering working capital.
The Price/Sales and EV/EBITDA ratios are also good when analyzing internet companies
and this ratio reflects the importance of internet portals to increase their revenue, symbolizing
marketplace acceptance. The P/E ratio is more straightforward, but revenue and EBITDA require a
closer consideration of the nature of the business of internet companies.
The semiconductor industry is unique in that it is highly cyclical. In contrast with say the
telecom industry, investors can be sure that the market will have a turning point in the near future.
To evaluate a semiconductor company, it is more important to understand the nature of
semiconductors. By looking at units a company ships versus its competitors, analysts can discover
the company’s market share. Examining manufacturing process efficiencies and performance results
based on industry standards reflect profits and product performance of one company with respect to
its competitors.
Important Players
Most of the important players in the technology industry can be grouped into one of the following
sectors: Hardware and Equipment, Semiconductors, Telecom, Internet, or Software and Services.
Hardware and Equipment
Key players in the Computer Hardware industry include Apple, Dell, and Cisco. Apple produces a
range of personal computing solutions, such as desktop and notebook computers, as well as server
and storage products. In addition, Apple generates a suite of associated peripherals, the most wellknown of which is the iPod. Dell Computers is known for its fully customizable approach to
building computers. Via internet or phone, consumers can pick and choose their computers’ unique
specifications. Like Apple, Dell develops and markets PCs, assorted peripherals, server and
networking tools, and storage solutions. And HP has just beat Dell as the number one supplier of
PCs. Cisco differs from its hardware competitors in that it specializes in networking security
products, routing and switching technologies, and storage area networking tools.
Semiconductors
The top companies in the semiconductor industry are Intel and the Taiwan Semiconductor
Manufacturing Co. Touting the slogan “Intel inside”, Intel works to build semiconductor chips and
boards for use computers, servers, networks, and communication tools. The Taiwan Semiconductor
Manufacturing Co., with a market cap of 58,000 million, specializes in manufacturing and selling
integrated circuits and semiconductor devices. The company uses the designs of its’ consumers in
manufacturing ICs.
Telecom
Nokia and Qualcomm are two of the biggest players the communication equipments industry. Nokia
manufactures mobile devices and is currently expanding its multimedia unit, which develops mobile
multimedia capabilities like mobile photography and music. Qualcomm develops and manufactures
digital wireless communications products. The largest telecom services companies are AT&T and
Regional Bell Operating Companies such as Verizon, SBC Communications and Bell South. AT&T
dominates in the US long-distance operator, while RGOC companies dominate in regional telecom
services. And also worthy of mentioning is Vodafone, the world’s only truly global mobile telecom
operator.
Software
Microsoft is a multinational corporation that develops and manufactures a variety of software
products, the most well-known of which is Microsoft’s Office suite. Microsoft’s market cap of
280,000 million far exceeds Oracle, the software industry’s second biggest player in terms of market
cap.
Internet
A quick glance at today’s most visited internet sites clearly indicates Google’s dominance of the
computer services industry. The Google empire includes Froogle, the recently-acquired YouTube,
Gmail, and a variety of search services. Additionally, Google recently unveiled a suite of internetbased document and spreadsheet “software”, allowing for easier project collaboration.
Trends
Innovation and creativity lie at the heart of the technology industry. The continual supply of
fresh ideas is what often leads people to characterize this industry as a roller coaster market. New
advances allow the face of the industry to perpetually change, as chips get smaller and gadgets
become more convenient and useful. The fast pace of this industry is characterized in the rapid
expansion of companies from new start-ups to big Fortune 500 companies.
The tech or “dot-com” bubble of the late 90s was definitely a key shaper of this industry.
With the advent of the internet and PC as a new and exciting tool, people started to invest more and
more into the business. Start-up companies that had started with but a small pool of capital and a
group of smart individuals seemed to become million dollar businesses overnight. People seemed to
be making fortunes; spirits and confidence soared high, but with the bursting of the bubble and the
plummeting of stock prices, many people eventually lost a large portion of their savings. Today, the
industry is no longer characterized by the same over-optimism that pervaded the scene during the
late 90s. However, the technology industry continues to be characterized by the same innovation
and inventiveness that shaped the tech bubble a decade ago.
Over the past few years, the telecom industry in particular has undergone tremendous
changes. With the salience of cell phones and mobile devices in the world today, this sector is surely
one of the fastest growing in the industry. Those who have managed to establish themselves n the
market, like giant AT&T, have reaped profits while the high barriers to entry in the industry have
prevented other smaller, start-up companies that don’t have much capital upfront, from doing so.
The technology industry includes a variety of different sectors, varying from semiconductors
to telecommunications. Each sector has its unique trends. For example the semiconductor sector is
constantly involved in what is known as scaling, reducing its elements in size. The health care
industry has evolved with the change in population. The greater vehicle behind the technology
industry is the latest demands of consumers. Companies compete to develop the most advanced
technology to meet consumers’ ever-increasing need to have information at their fingertips. For
example, as technology has allowed people to travel frequently, consumers also require better and
faster communication. The changing lifestyles of consumers have changed the technology industry.
Overall the industry has seen greater demand for high technology as science advances.
Sources
<www.investopedia.com>
<finance.yahoo.com>
<finance.google.com>