Technology Hype Cycles

technology stocks

Earnings season is underway, and investors speculate on the latest profits and losses from the world’s largest companies. To be honest, I’m a bit bored with the overreactions and the constant chatter from CNBC and the other media outlets. So instead, I tend to focus on major trends and opportunities. One of the key things that I like to focus on right now is how to invest in technology the right way. Today, I want to show you one of the most essential tools you can use to make an intelligent decision on when to invest in new, emerging, and legacy technology. 

Learn the Pathway

When you invest in a technology, you need to learn its lifecycle and where it lies in that cycle. Information technology giant Gartner has developed a fascinating lifecycle of most technology. Gartner calls the five stages of any technology “hype cycles.” 

Similarly, the cycle of investment into those spaces tends to correlate with each movement. 

Cycle 1

Cycle One is the innovation trigger. This happens when a technology breakthrough occurs. You’ll hear fascinating concept stories in the media. Investors will want to dive headfirst into these ideas even though there isn’t any commercially available product in existence or its viability remains unproven. However, in the world of investments, you see a lot of big stories that drive capital investment. This is where a small investment can turn into a lot of money quickly. 

Cycle 2

Cycle Two is the peak of inflated expectations. This is where we hear a lot of success stories in the media. You’ll read incredible biographies about innovative founders. Think of people like Elizabeth Holmes at Theranos or Trevor Milton at Nikola. Both of their companies would take the world by storm in blood testing and electric vehicles, respectively. (Obviously, that didn’t work out for either of them.) This phase tends to attract significant amounts of capital, and with it, higher expectations. This is the period that investors should use trailing stops to protect their investments.

Cycle 3

Cycle Three is the trough of disillusionment. We see interest in these technologies decline during this phase or investors start to fret over failures to deliver on promises. Only those companies that improve their products and attract more capital can survive this phase. However, many do not, and even those with solid fundamentals can experience sharp price selloffs. If you played defense and used trailing stops, you might look to buy your shares at lower prices. 

Cycle 4

Cycle Four is the slope of enlightenment. This period shows stronger promise for technology. We witness a rise from the ashes for investors who overcome their viability fears. We begin to see next-generation versions of the products or services, and consumers start to pay attention. This is also when large competitors start to fund their products to address the potential market. Now is a good time to actively trade these names and build a position using cash-secured puts. 

Cycle 5

Finally, Cycle Five is the plateau of productivity. During this period, mainstream adoption occurs, and investors start to realize gains from cash flow. This is where you might find growth and income potential and a cornerstone investment for the long-term. Here is where it’s more logical to use the leverage of call options.

Where Are We?

So, where are today’s emerging technologies right now? Let’s take a look at Gartner’s current chart. 

The investments at the innovation trigger all make for unique investments. All are attracting venture capital. But I want investors to know that as they start to move into the peak of inflated expectations, it is time to urge extreme caution. 

Data fabric, decentralized finance, and non fungible tokens are very hyped right now. If you’re investing in their technologies, if you can use trailing stops, do so. If you’re a venture capital investor, understand that there might be some tough times ahead. Always know that with every investment comes hype. I’ll be back tomorrow to talk about a company that I love and its path through these cycles.

Garrett Baldwin
Garrett Baldwin
Garrett Baldwin joined Godesburg Financial Publishing as Chief U.S. Markets Analyst in early 2021. A Johns Hopkins-trained Economist, he’s worked with hedge funds, venture capital firms, angel investors, and economic advisors to the U.S. government. Baldwin specializes in market anomalies and alternative investments. He’s written extensively on momentum, value, insider buying, and other unique strategies that provide investors that elusive edge.
Garrett Baldwin
Garrett Baldwin
Garrett Baldwin joined Godesburg Financial Publishing as Chief U.S. Markets Analyst in early 2021. A Johns Hopkins-trained Economist, he’s worked with hedge funds, venture capital firms, angel investors, and economic advisors to the U.S. government. Baldwin specializes in market anomalies and alternative investments. He’s written extensively on momentum, value, insider buying, and other unique strategies that provide investors that elusive edge.

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