Date
17 January 2017
When we think of Taobao, we think of playing some game and when people say they will “give you a ‘like’,” they're basically saying they're addicted to social networking sites. Photo: HKEJ
When we think of Taobao, we think of playing some game and when people say they will “give you a ‘like’,” they're basically saying they're addicted to social networking sites. Photo: HKEJ

Tech stocks have a tipping point — where is it?

There’s a big possibility that the US stock market will outperform those in Hong Kong and mainland China.

The technology-heavy NASDAQ index is likely to report better performance than the Dow and S&P 500 indices.

This round of tech fever is different from that in 2000 because it’s supported by profits.

Choosing the right technology and internet stocks is one of the biggest challenges.

Malcolm Gladwell’s book, The Tipping Point, might offer some guidance.

It argues that some ideas, products and services will suddenly become hugely popular but others won’t. Why?

One simple reason is the transformation of quantitative into qualitative changes (the tipping point).

But does it mean we should wait for the next qualitative change?

The answer is no.

Gladwell mentions three factors that will trigger a tipping point.

1. The minority principle

Trends are like yawning. It is contagious and is usually started by a small group of people.

A prime example is the shoe maker Hush Puppies. The brand was dying but suddenly, after several New York teenagers made it a fashion icon, it sold 430,000 pairs in 1995 and two million pairs in 1996.

Recall the process that message software such as ICQ became popular. It was very likely adopted by the most outgoing people in a group of friends.

2. The eye-ball factor

Modern consumers are suffering from an information explosion. So trends should be about catching the consumers’ attention and planting a message in their hearts. A simple slogan will help consumers focus on a brand.

When we think of Taobao, we think of playing some game. When people say they will “give you a ‘like’,” they’re basically saying they’re addicted to social networking sites.

3. The environmental factor

People can’t change the environment but the environment can change people.

If you can live without a fixed-line telephone in your house, what about going without a cell phone?

When most people around you are using instant messaging, will you feel isolated if you are not doing the same thing?

Services and products can spread in a short time but not from nowhere.

When Uber landed in Hong Kong, the early adopters gave it very positive reviews, then the comments spread by word of month.

Will you go against the trend by calling a taxi through an old-fashioned call center when everybody else is using Uber?

What investors should do is think about which products fulfill these three requirements.

There’s another key difference between the old and new generations of technology/internet companies.

The former is focused on a major product while the latter keeps updating the product or service.

Look at Yahoo and Microsoft.

They lack a growth engine after their main product reached the peak of their life cycle.

The new generation of tech companies should keep launching new products (videos, maps, driverless cars, etc), so investors don’t have to worry if they can’t buy shares in a company that is not yet listed.

In the next two years, NASDAQ will continue to outperform the market in Hong Kong and the mainland.

This article appeared in the Hong Kong Economic Journal on Dec. 30.

Translation by Myssie You

[Chinese version中文版]

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MY/JP/RA

Columnist at the Hong Kong Economic Journal

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