Welcome to the tech sector, where many a fortune has been made—and lost—in the blink of an eye. Memories of the late-1990s dot-com bubble and its dramatic burst in 2000–01 still loom large in the minds of many investors. Fueled by heady growth rates, speculation, overconfidence, and plenty of venture capital, tech stocks—especially those that had anything to do with the Internet—enjoyed meteoric rises followed by equally spectacular crashes just a few years later. Since then, many tech companies have risen from the ashes and soared to new heights.
Indeed, the tech sector is full of fast-moving, ever-changing companies, making it an exciting arena for investors. However, those very same traits also make the sector challenging territory for confidently predicting excess returns over the long term. That’s why we think it’s important to look at sustainable competitive advantages in addition to growth potential when looking for investment opportunities in technology. Of the 140 tech companies we currently cover, about 15% have wide moats—most of those occurring among software and semiconductor companies. The rest of the sector splits fairly evenly among no-moat and narrow-moat firms, with many of the narrow moats stemming from high customer switching costs and intangible assets, as well as other moat sources, as Figure 15.1 illustrates.