When Is A Tech Company Not Really A Tech Company?

Michael Teague  |

The tech sector is comprised of a wide range of industries and companies that are classified under that rubric because their businesses rely on some aspect of technology in order to make a return, from the basic manufacturing of hardware, computers, and machines, to the development, programming and sale of software/apps, and everything in between.

In recent years, however, the tech sector has undergone significant changes that have expanded the definition of what a tech company is or can be. But while mobile-friendly companies such as Google (GOOG) , Apple (AAPL) and Facebook (FB) have benefitted greatly from the increasing importance and ubiquity of mobile technology, there are indications that the newest golden goose of the industry cannot be a panacea for everyone.

Throughout the course of 2013, there have been a couple of succinct examples of the problems associated with the rush to jump on the newest tech bandwagon. Companies like Groupon Inc. (GRPN) and Zynga (ZNGA) , who not long ago IPOed amid clouds breathless anticipation on the part of their investors, have spent the better part of 2013 in an atmosphere of cynicism and existential uncertainty.

Both companies share the (nowadays not-uncommon) distinction of being listed in the tech sector, despite the fact that there are legitimate questions about whether this designation is merited by either.

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Groupon, as is well-known, is a company whose bread and butter come from selling coupons, and though technology is certainly an indispensable aspect of their operations, without which they could not survive, they are still not a tech company in the more traditional sense of developing and innovating hardware or software. Instead, they use the new opportunities that have been introduced by mobile technology to sell a product.

Zynga, for its part, does indeed develop games and apps, or at the very least purchases smaller companies who do so, and its business would certainly not exist as it currently does without mobile technology. But ultimately Zynga makes its money from providing a product to consumers in a way that is more or less analogous to the introduction of the original 8-bit Nintendo home video game system in the late 1980’s.

Both companies are classified as techs, even though it seems as though what they are doing essentially involves the replacement of the physical marketplace or store with a virtual one. In this sense, they are both more like eBay (EBAY) or Amazon (AMZN) than they are a tech firm such as Microsoft (MSFT) .

But the question of whether or not these companies can be justifiably classified as techs is not a rhetorical one. It is important because of the very nature and appeal of tech companies as high-growth investment options. Groupon’s IPO, for instance, had the company valued at $20 per share, then the biggest debut for a web-based company since Google. Since late 2011, however, Groupon has tanked precipitously, losing over half of its value and eventuating in the ouster of founder Andrew Mason, which seems to have stabilized the situation somewhat.

Companies who take on the posture of high-growth techs even though they are bereft of the typical features of high-growth techs have garnered the high earnings multiples of their peers, though the stock performance has not lived up to valuations. And though this phenomenon has not reached the epidemic proportions that it did during the tech bubble of the late 1990’s and early 2000’s, it is all the same one that has been recurring with greater frequency in recent years as mobile technology has continued on its inexorable path towards the center of the economy.

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