Technology is different from every other sector by virtue of one important factor – it scales. Because technology is scaleable, firms penetrate international markets easily, exercise greater pricing power, and capture bigger margins.
Businesses exist to solve problems. In solving problems, they create value. Capturing that value, on the other hand, is independent of how much value a business is able to create.
For instance, Airlines in the US create a lot of value, yet they capture almost none of it. Of the billions they bring in revenue, their margins are stagnant, if not continuously declining. In 2012, airlines brought $160 billion in revenue and charged an average of $178 per flight, but only made 37 cents of profit.
In contrast, you have Google, which brought in $50 billion in 2012 but kept 21% – over $10 billion – as profit. Over the last five years, tech growth stocks have outperformed established sectors like airlines because they’ve captured a greater proportion of the value they have created.
