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1 top tech stock to buy and 1 I’d stay away from

Risk reward ratio / risk management concept
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The tech sector has performed exceptionally well in recent years. For example, the NASDAQ index houses a lot of major tech names. Over the past five years, the index has almost trebled in value. Individual stocks may have even outperformed this. Given that some top tech stocks now look quite expensive, I need to be selective in where I invest. So here is one stock I’d buy and one I’d stay away from.

Upbeat sentiment 

The top tech stock I’d look to buy is Oxford Nanopore Technologies (LSE:ONT). It’s a biotech company that went public earlier this year. The firm has a main focus on DNA/RNA sequencing technology. This has a broad range of commercial uses, which I explain in more detail here.

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I wanted to wait and see how the share price performed after the initial volatility from the IPO. However, I don’t think I can afford to wait much longer before jumping in, due to a trading update last week. Previously, it was looking for 30%-40% revenue growth from the core revenue line this year. That has now been upgraded to 60%-70%. This is due to demand related to Covid-19 and also thanks to the addition of new customers.

I think this looks positive, so view this as a top tech stock to buy now and hold for the future.

One risk is the valuation. The company only went public at the end of September, with a value of £3.4bn. Now this is 40% higher when accounting for the current share price. It’s a large premium added on in a short period of time, so future revenue growth projected needs to be manifested to justify this!

A tech stock I’m cautious about

The tech stock I’d stay away from at the moment is Darktrace (LSE:DARK). The cyber-security firm have offices both in the US and UK, but is listed here in the UK. Since the IPO earlier this year, I’ve struggled to find enough compelling reasons to buy shares. 

For example, back in September I noted that results were due out shortly. For the past few years of operations, the company had been growing revenue but ultimately loss-making. 

Results for the year ended 30 June 2021 unfortunately did little to really impress me. Revenue grew year-on-year by 41.3%. The customer base also grew by a similar amount. Yet it posted a net loss of $149.5m, up from the 2020 figure of $28.6m. I do note that there were high costs associated with the IPO and other one-off costs. But this still doesn’t translate to great reading in my opinion.

My other concern about the tech stock is that it’s playing in an area with high competition. Cyber-security is a lucrative market, which is why large tech firms are already present here. These bigger companies could restrict the growth of Darktrace going forward.

I could be wrong here, and shareholders could land a windfall if Darktrace is bought out by a larger company. Or it could manage to build up market share over time through organic growth.

Overall, I think I can still find other good tech stocks to buy with potential after doing my research.

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And with so many great companies still trading at what look to be ‘discount-bin’ prices, now could be the time for savvy investors to snap up some potential bargains.

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jonathansmith1 and The Motley Fool UK have no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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