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The ins and outs of investing in tech stocks in 2021

With the tech-heavy Nasdaq 100 index posting a fresh all-time high in the past few days at almost 13,600, tech stocks remain one of the hottest segments of the financial markets since the pandemic prompted a strong positive momentum for the industry amid lockdowns.

The rally that followed the index’s March lows has been quite a ride for investors, as those who decided to buy amazon shares or other similar tech stocks back then have seen the value of their portfolios more than double in roughly 10 months, although the Nasdaq has declined from its latest peak in the past few days amid the turmoil caused by a series of bizarre events such as the GameStop (GME) short squeeze.

In this regard, it would be fair to ask if tech stocks remain attractive at their current levels, given that, in a post-pandemic world, these companies might lose some of their shine as their revenues will likely grow at a much slower pace than they have during the crisis.

To respond to that question, let’s take a closer look at the ins and outs of investing in tech stocks in the current environment, allowing investors to make up their minds based on the information that will be provided.

The ‘ins’ of tech stocks

According to data from research firm McKinsey & Company, one of the factors that supports a sustained bullish thesis for tech stocks – even after the pandemic situation subsides – is an acceleration in the adoption of digital solutions to support the operations of thousands of businesses around the world.

In this regard, McKinsey’s report highlights that the pandemic has lifted the percentage of customer’s digital interactions by more than 20% – potentially accelerating the adoption of digital solutions by 3 years on a global scale.

Notably, 53% of the organizations that responded to the firm’s survey indicated that they believe that the demand for online shopping will keep increasing even after the health emergency becomes a thing of the past, while 54% also believes that businesses will keep migrating their digital assets to the cloud.

In a context such as the one portrayed by this report, it is highly likely that tech stocks will continue to be among the biggest winners in the stock market, as although revenues can temporarily retreat once things return to normal, most companies have already experienced the benefits of relying more strongly on digital solutions.

If that is the case, this realization will progressively drive higher levels of demand for tech firms until their sales bounce back to the numbers we have seen during the pandemic.

The ‘outs’ of investing in tech stocks right now

The latest frenzy seen by shares of companies like GameStop (GME) and AMC Entertainment (AMC) just goes to show that the stock market has gone a bit out of hand amid the introduction of free trades for retail investors and due to the use of derivatives like call options – which have led to some temporary distortions in company’s valuations.

In this particular environment of extreme greed, tech stocks remain one of the most crowded trades on Wall Street, as indicated by Bank of America’s Fund Manager Survey, where a total of 80% of the survey’s respondents said that they were currently holding long positions on tech firms due to their alleged upside potential.

Crowded trades are particularly dangerous as they can lead to distortions in the supply and demand dynamics of the markets.

Similar to what has happened to the most shorted stocks recently, a long-squeeze can unfold for the most crowded sectors of the market, pushing investors to sell their shares if the markets were to tank at some point in the following months.

In light of this data, it does seem that tech stocks have some downside potential and this is something that investors should know before entering a position at a moment when the entire market seems to be convinced that there is no way that the industry can take a hit.

Bottom line

With a bit of info about tech stocks in 2021 you can make a decision as to whether you’ll jump the bull train by buying individual shares or even exchange-traded funds (ETF) that track the technology sector, or if you will rather turn to other less crowded opportunities within the market that can provide both upside potential and less pronounced odds of a strong downturn.

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