After a strong performance in recent years, there have been growing worries about the potential for a tech crash in 2022.
But why worry about a crash? I see it as a buying opportunity for my portfolio. Here are three tech companies I would happily add to my portfolio if they tumbled in a crash. I like them because I think what they all have in common is a strong, sustainable competitive advantage.
Intuitive Surgical
The medical device company Intuitive Surgical has the sort of business model that gets taught in universities.
It makes robotic surgery equipment for medical procedures. That means that its customer base is deep-pocketed healthcare providers who are willing to pay a premium price. The initial machine installation is only the start of a customer spending money. Each procedure needs sterile peripheral equipment attached to the machine, so there is a constant stream of aftersales. The company has built a sophisticated database of procedures. So, as Intuitive grows it is able to improve its offering and therefore competitive advantage.
But with a price-to-earnings ratio of over 70, the shares look expensive to me. If they tumble in a tech crash I’d happily snap some up for my portfolio. One risk I see with Intuitive is that the attractiveness of the business model could attract more competitors. That could lead to lower profit margins.
I’d buy Google in a tech crash
For a company to become a verb indicates its wide reach. When someone refers to a digital search as “Googling something” they are referring to the flagship product of parent company Alphabet (NASDAQ: GOOG).
The company’s business model is hugely lucrative. Like Intuitive, it is also sticky. The more a user engages with Google, the more personalised a service it offers them. That can reduce their likelihood to switch to competitors.
In 2020, the company reported income of $41bn on revenue of $183bn. Not only is that a very large profit in absolute terms, it also highlights the attractive profit margins a scalable tech company can achieve. With its established customer base and technology, I think Google has set the stage for years of continued profit growth.
A key risk I see is that it is actually too successful. Like Microsoft before it, that could attract ever more regulatory intervention, which could hurt profits. But if the Alphabet price sinks in a tech crash, it is on my shopping list.
Amazon
Like Alphabet, Amazon (NASDAQ: AMZN) has a huge customer base that is deeply embedded in its ecosystem. That could be a driver of profits for decades. Last year the company recorded $21bn of earnings. I regard that as amazing for a company which, like Google, was only founded in the past several decades.
Amazon’s business model has evolved a lot. Its online retail operation remains key to its success. But its enormous web hosting service has become an important part of the company’s business too. The larger Amazon gets, the more efficient its business can become. I think that could support further profit growth. Like Alphabet, though, that risks regulatory intervention that could hurt revenues and profits. If the Amazon share price crashes, I would happily buy it for my portfolio.
Christopher Ruane has no position in any of the shares mentioned. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK has recommended Alphabet (A shares), Amazon, and Microsoft. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
