3 Metrics to Know When Investing in Technology Stocks

The S&P 500, a widely-followed US stock market benchmark, has gained an impressive 10% since the start of the year. Much of the gain have come from just a few of the biggest tech stocks within the index.

Technology stocks in the US have been investment darlings of late, with investors attracted to their huge growth potential. CNBC also recently reported that millennials in the US favour technology stocks over traditional dividend-yielding stocks.

In light of these events, I thought now may be a good time to discuss three key performance indicators all technology investors should be familiar with. Although there aren’t that many technology stocks listed in Singapore, it’s still worthwhile knowing the indicators, especially if tech stocks start appearing here in the future.

Monthly active users

Monthly active users, or MAU, is the total number of unique investors visiting or using a site or app in the last 30 days.

This metric is especially important in judging the performance and growth of social media platforms and games. The larger the MAU, the easier it could be, in theory, for a company to generate revenue either through advertisements or by making users pay.

For social media companies, the MAU metric can also give investors an idea of how far the company’s reach is and whether there is room for it to grow its user base over time.

A larger MAU allows advertisements to reach a larger audience, and gives marketers greater reason to advertise on the platform. It also enables marketers to have a wider range of customer profiles to target. But if a social media company’s MAU is too large, it could mean that saturation point is near, and so growth could become hard to come by in the future.

Average revenue per user

The average revenue per user, or ARPU, gives investors an idea of how much revenue a company generates from each user of its service or product. This metric gives investors a better idea on how user-growth can affect a company’s revenue and profitability.

A consistently increasing ARPU over time is also a good sign. For social media companies, this can be done via increasing advertising load per user, or increasing the price per advertisement. The time spent per user on social media sites is another important metric that investors should consider keeping an eye on.

The ARPU can also be used to measure the performance of game or dating site companies. Their revenue model may, however, be slightly different from social media companies, as they rely more on users paying to buy premium features, or subscribing for the service, rather than using advertising as a source of revenue.

User acquisition cost

User acquisition cost is important as it shows us how a company is able to use its marketing dollars to grow its user base. Companies that can keep this figure low, preferably below their ARPU, have a sustainable cost of growth.

Some tech companies spend too much money on acquiring new users, leading to heavy losses in exchange for growth. Investors need to be aware that these companies, despite their solid growth numbers, may not be able to sustainably grow at high rates for long without putting a strain on their balance sheet.

The Foolish bottom line

Many technology stocks in the US have performed admirably over the last few years.  However, there are some technology companies that may be at risk of overstretching their finances or growing at a pace slower than their counterparts.

As investors, the three metrics above can help us better separate the potential winners from the potential losers in the technology space.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Jeremy Chia doesn't own shares in any companies mentioned.