Author: Tide Research
Investment Methodology for Tech Stocks: The N-Shaped Pattern, Two Waves, Four Key Levels
Recently, the investment strategy team at CITS Securities released a lengthy report titled "Methodology for Investing in the Technology Industry," aiming to answer a question all technology investors ask: How should one buy and sell technology stocks?
For a company like Changjiang Power, analysts can calculate how much it will earn each year over the next decade; discounting those future cash flows gives you the stock price.
Tech stocks don’t fit this calculation. Because technological advancement is discontinuous—a single catalyst can completely rewrite the industry’s logic. In 2019, the market believed general artificial intelligence was still 80 years away; by 2022, that timeline had shrunk to 8 years; then in 2023, with the release of GPT, the timeline was rewritten again.
Data for A-shares is more direct: tech stocks that doubled in price the previous year fell an average of 40% the following year. Only 5% of tech stocks have maintained annual growth of over 30% for five consecutive years.
In conclusion, tech stocks generate profits through market swings—you won’t get rich by holding and doing nothing.
N-shaped: two waves, four points
The core framework of this tech stock investment methodology can be condensed into a single diagram: the N-shape. Depicting a single tech market cycle as an N, there are four key points: A, B, C, D.
A→B is the first wave, from 0 to 1.
This round is profiting from the narrative. The company has no earnings, and the product hasn’t even been launched yet—but the story is compelling enough. The valuation method is blunt: estimate the total market potential of the entire industry, allocate the market cap ceiling across each segment, and cap the market cap-to-output ratio at around 3 to 3.5 times.
Current direction in the A→B phase: Embodied Intelligence, Low-Altitude Economy, Commercial Spaceflight, AI Applications.
B→C is the callback period.
The first wave is over, the story is told, and the stock price drops. Most tech stocks die here and never see a second wave.
C→D is the second wave, from 1 to 100.
This round is profiting from earnings growth. The company is starting to deliver results, adoption is rising rapidly, and the stock price is climbing again, but the P/E ratio is falling because profit growth is outpacing the stock price increase.
Examples that have already progressed from C to D: optical modules, PCBs, AI computing chips, and data centers.
Point C is the most important
Point C is where institutional investors truly gain the upper hand.
Characteristics of point C: The stock price has already declined significantly from point B, market sentiment is poor, there is no clear ceiling in sight, and most investors hold light positions. Yet precisely at this point, earnings begin to emerge, orders start to materialize, and the industry’s fundamentals truly take off.
How to determine if point C has been reached? Three elements are required—missing any one is not enough:
Big tech capital expenditures. Are major companies investing heavily in this direction? Capital expenditures are to industries what credit is to the economy—without funding, an industry cannot take off. The pace of the AI industry follows this pattern: In 2023–2024, overseas cloud providers initiated capital expenditures and purchased overseas chains (triggering Zhongji Xuchuang); in the second half of 2024, ByteDance began capital expenditures and purchased domestic computing power (triggering Cambricon).
Blockbuster product. Is there a product that has torn open a gap in penetration? The iPhone 4, AirPods, Model 3, ChatGPT, DeepSeek—each blockbuster marks the beginning of a C→D shift.
The industrial chain is being implemented. Have any companies received orders? After major players have made capital expenditures and created hit products, forming a closed loop, companies along the industrial chain are beginning to generate revenue, and the positive cycle is now in motion.
The report summarized it in one sentence: As soon as all three elements are in place, you should act quickly—that’s the most critical move in capturing a major market rally.
How do you identify Point D (when to sell)?
This section of the report introduces the "M Top" framework, where M represents two peaks: the first peak is the trading top (emotional peak), and the second peak is the fundamental top.
Three key signals to identify a fundamental top: Is the macroeconomy showing signs of recession? Is there a price war emerging on the supply side? Has capital expenditure on the demand side begun to decline? If two or more of these occur, the current industry cycle is essentially over.
If the leader declines due to macroeconomic or external factors, the direction aligned with industry trends is often the best buying opportunity.
For example, in 2010, when the Nasdaq declined, Apple presented a buying opportunity; in 2020, during the pandemic-induced market drop, Tesla became a buying opportunity; the trade war also created buying opportunities in the AI and technology sector. NVIDIA’s sell signals depend on two key conditions: first, whether the U.S. economy experiences a hard landing—if so, sell, because the cash flows of the five major cloud providers are closely tied to consumer spending, and any disruption to their cash flow sources would invalidate the entire logic; second, whether the competitive landscape deteriorates—if it does, sell as well.
In terms of U.S. stock mapping, it has historically been an important investment methodology. From the 1990s to 2000, the Japanese stock market fell by 67%, but companies like Tokyo Electron, Advantest, and Toshiba performed well. The quantitative logic behind U.S. stock mapping has little correlation with performance, but shows strong correlation with the price appreciation of their U.S. counterparts. The most effective approach is industry chain mapping—companies like Zhiwei Innovation and Luxshare Precision have generated significant gains by riding upward industry trends and consistently delivering profits.
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