Defining Tech Companies: Are Market Leaders Miscategorized?

Joel Anderson  |

Investopedia defines the technology sector as follows:

"A category of stocks relating to the research, development and/or distribution of technologically based goods and services. This sector contains businesses revolving around the manufacturing of electronics, creation of software, computers or products and services relating to information technology."

As such, internet companies have traditionally been classified as tech companies from the advent of the internet. Most stock screeners will list any internet-based company as a tech company. However, one may begin to wonder if that classification isn't growing woefully outdated.

In the early days of the internet, it was clearly a new trend in technology and it was easy to group companies there regardless of their core services. However, as the internet becomes a commonplace feature in almost every American household, is it time to reconsider how internet companies are classified in the market.

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Several Questionably Classified Companies

Groupon (GRPN) is classified by as a member of the technology sector. Why? When one considers what Groupon does, offer discounted coupon offers to large groups, it isn't clear how it fits into the above definition in any way. In fact, it appears as though the only thing making Groupon a "tech" company is that it started on the internet. Should Groupon have begun as a brick-and-mortar establishment before branching out onto the internet, would that have resulted in a different classification for the company's stock? And if so, why would that difference be important?

For all intents and purposes, Groupon is a company that should easily fall into the services industry of the consumer discretionary sector, which Investopedia defines as: "A sector of the economy that consists of businesses that sell nonessential goods and services. Companies in this sector include retailers, media companies, consumer services companies, consumer durables and apparel companies, and automobiles and components companies."

Groupon Not Alone

With an increasing number of major internet companies being founded around trends in consumer goods and ideas that aren't rooted in software or technology, it could be time to see more traditional definitions of the tech industry stop classifying any internet companies as tech companies. Some, like Google (GOOG) may still be accurate because the company's core business remains its carefully crafted search engine. Others, like LinkedIn (LNKD), Pandora (P), or TripAdvisor (TRIP) don't seem to have any concrete reason for qualifying as tech companies aside from having their origins on the internet.

With the IPO of Yelp (YELP) and the pending IPO of Facebook (FB), it's becoming clearer that the internet has become a major part of the American business landscape and no longer represents a technological novelty that it might have been viewed as in its early days. As such, it's possible that classifying internet companies that provide services to consumers as "tech" companies is becoming increasingly out of place.

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