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2 reasons why tech shares keep outperforming the share market

Tristan Harrison
cloud computing, cloud, software, technology

Technology sector shares have been strong performers on the ASX and overseas for a number of years.

When you think of Microsoft, Amazon, Alphabet (Google), Facebook and Apple, it’s hard to think of a better-performing group of blue chips in the world.

On the ASX we’ve seen our own group of tech winners like Appen Ltd (ASX: APX), WiseTech Global Ltd (ASX: WTC), Altium Limited (ASX: ALU), Afterpay Touch Group Ltd (ASX: APT) and Xero Limited (ASX: XRO) do very well over the past five years.

So why are they doing so well?

Investor momentum

It’s fun and often profitable, at least in the short-term, to invest in shares that are going up. The growth in the share price is often reflective of underlying growth of the business, so the rise is somewhat justified.

Investors being drawn to these growth stories is a self-fulfilling prophecy that sends the share price higher as buyers outweigh sellers. You’d expect the share price to eventually come back a bit but we haven’t seen a major correction except for a brief time almost a year ago in October to December 2018 – but that has seen been reversed and passed. Investing in the most expensive shares has continued to pay off. 

Lower interest rates are also helping justify the higher prices we are seeing with these tech shares.

Strong fundamentals

Most tech shares have an advantage against normal businesses. The products or services of the tech shares are essentially infinitely replicable for very little cost, meaning that all additional revenue can mostly be added straight onto the bottom line. But that’s not the case with resources, retail, food or other physical products or services, there’s a cost for new sales.

But this growth advantage is now recognised by most investors, which is why the local and international tech businesses are priced so much higher than the market. They may have a lot of revenue and profit margin growth potential, but they are priced for a lot of that potential success.

Foolish takeaway

If you can find the right tech shares with good management, a long-term growth runway and a good balance sheet then you could be onto a winner. The most important thing is to buy at the right price, which could be hard in this low-interest world.

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Tristan Harrison owns shares of Altium. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of WiseTech Global. The Motley Fool Australia owns shares of AFTERPAY T FPO, Altium, Appen Ltd, and Xero. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. 2019