Tech stocks may just be getting Nearly every industry from oil to aviation is still reeling from the ongoing pandemic. However, the tech industry has been largely impervious to this health and economic crisis with many tech stocks reaching all-time highs.
But is the rally over? Or is there more steam left in it?
Not only leading the steepest bull run ever since March, tech stocks have done exceptionally well since the start of the century.
Big Tech - Apple, Microsoft, Amazon, Alphabet and Facebook - alone represent more than 18 per cent of the value of the S&P500. This is a scenario that has never been observed since the dot-com bubble in 2000, whereby Microsoft, Cisco, General Electric, Intel and Exxon Mobil held the highest market caps. The bubble eventually burst – which begs the question, are current valuations of Big Tech a warning?
There is the scrutiny, of course
Recently, executives of Apple, Amazon, Alphabet and Facebook were called to appear before a US Congress hearing to ensure their respective industries remain competitive and to prevent a monopolistic market, thus avoid any infringement of anti-trust legislation. A lack of competition for these tech giants can lead to inflated prices exceeding fair value, and therefore uncertainty prevails around their future.
Clouds are also forming at a macroeconomic level. An escalation of geopolitical tension between the US and China could wreak havoc. This may become the source of volatility in prices in the short term as we get closer to the November US Presidential elections, the outcome of which is also likely to sway the market.
But does that mean that a major setback in tech stocks is on the horizon?
Don’t overlook fundamentals
Not likely. Unlike in 2000, big tech companies today are valued at much fairer prices, with robust fundamentals and have strong earnings that gain every quarter.
The year-to-date profits of these tech firms are especially impressive given that they occurred during a quarter in which the US economy contracted, meaning its combined relative share of the economy increased significantly.
The second quarter earnings clearly suggest these companies are steadily moving ahead and meeting expectations of analysts. Combine this growth with lower expectations, fair valuations and a higher reinvestment rate suggests current prices may be more sustainable than ones in 2000.
More to come?
Nearly all the Big Tech firms are larger this year when compared to 2019 – which implies there is enough evidence to justify current prices. But what does the future hold?
Considering the global shift towards tech, the future seems bright. Cloud computer, analytics, artificial intelligence and cyber security are some of the high growth areas where there will be an explosive demand over the next decade. Big Tech is already lining up to receive their share of the market.
For instance, Microsoft has evolved to offer more than just personal computing software. The firm is primed to grow in a world of new advancements with its enterprise solutions, especially Azure Cloud, which is Microsoft’s infrastructure-as-service based business. It is part of the company’s broader ‘intelligent cloud’ segment, which includes enterprise consulting and on-premise servers.
To put things in perspective, Azure was Microsoft’s smallest segment by revenue a year ago and is now poised to grow to become by far the biggest revenue generator. This explosive growth will certainly help sustain its stock price growth in the future.
The stories are similar for Apple, where growth in several areas like wearables are on an exponential rise, and Amazon, which is seeing huge demand in ecommerce and Amazon Web Services.
Tech companies show a very powerful growth path, with the pandemic having caused a seismic shift in how we utilise their technologies.
With this new reality, Big Tech is effectively guaranteed a powerful evolution for the near future. As long as these companies at least meet, and preferably exceed, current consensus on growth expectations, there soaring share prices will be justified.
While short term volatility exists due to eopolitics and COVID-19, we expect their long-term future to be bright.
- Madalina Rotaru is CEO of Key Way Markets Ltd, the operating company of CAPEX.com.
