Technology stocks are often considered too risky for many investors owing to their high valuations and at times difficult to understand products and/or services.
Warren Buffett, himself, largely avoids any company that he doesn't understand and this seems to be a prudent strategy especially for investors who are not completely sure about their prospective investments.
While there is little doubt some technology stocks can be difficult to understand, there are a number of stocks that are simple to understand and still offer the same exposure to this traditionally fast-growing sector.
Here are three tech stocks that are currently on my watchlist that I think could grow strongly over the next few years:
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Appen Ltd (ASX: APX) – Appen provides voice recognition and language data services to nine of the top 10 global technology companies. There are a growing number of applications for the company's services and it is already used in things like internet search engines, car GPS systems and online gaming. Importantly, Appen is already profitable and is growing revenue and profits quickly. Its FY15 full year results revealed revenue and underlying earnings growth of 62% and 136%, respectively. The company is also debt free and cash flow positive and this has allowed the company to declare a full year fully franked dividend of 4.2 cents per share. As 2015 was such a strong year for the company, management is only forecasting low-double digit revenue and earnings growth over 2016. Despite this, the company still appears reasonably valued trading at a trailing price to earnings ratio of around 20.
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BigAir Group Limited (ASX: BGL) – BigAir owns and operates Australia's largest metropolitan fixed wireless broadband network and also provides cloud-based services for businesses. The shares have fallen sharply since the release of its interim results that showed revenue growth of 54%, but underlying earnings per share growth of only 5%. This was a disappointing result as a sharp rise in costs significantly impacted the bottom line. A number of recent acquisitions also did not make a significant contribution to earnings, although management is expecting this to reverse in the second half. In fact, management is very confident of a much improved performance in the second half, which could give some investors hope of a turnaround. The shares are not overly expensive and any further falls could provide an attractive entry point for investors looking to take advantage of a short-term hiccup.
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Nearmap Ltd (ASX: NEA) – Nearmap's business model is pretty simple – it takes high resolution aerial imagery which can then be used be for things like insurance claims, urban planning and construction projects. Management changes, competition concerns and slower-than-expected progress in the US have impacted the share price recently, with the shares down 48% off their 52-week highs. Despite this, Nearmap still has the potential for strong growth especially if sales in the US take off. Until this occurs, however, the shares are unlikely to make a strong rebound and I would be inclined to keep this on my watchlist until there is evidence of further progress in the US market.
