In a locked-down world where people could not see a quick return to normality and almost every aspect of our lives was transferred online, tech businesses thrived while traditional businesses suffered enormously. If on top of that, we add a 6.5 trillion US$ government spending in 2020, the Federal Reserve claiming that interest rates will stay close to zero indefinitely, and billions of dollars going directly into the stock market from inexperienced traders using online brokerage platforms, you get what is called a bubble. Needless to say, the fracture between Wall Street and the real economy became huge, with the Nasdaq 100 beating every record and growing +77% since its lowest point in March. But there was another gap, inside Wall Street, and it is the one that value investors saw as an opportunity. In fact, oil companies, banks, industrials, and many more were all sectors whose stocks got dumped during the pandemic but that forward-looking investors appreciated enormously, as they are essential for the economy and will boom once the recovery takes place. What happened in 2020 with tech stocks is a phenomenon that deserves to be analyzed both from an economic and sociological point of view, as it’s a mix of speculation and impossibility to see a solution to the pandemic in the medium term. Many experts saw a correlation between the dot-com bubble in the early 2000s and the current market valuations of tech companies, but it doesn’t just end there. Sure, both periods share the speculative approach of retail investors to the market and the overestimation of technological advances of “hot” stocks, but the covid-19 pandemic has emphasized this kind of behavior by causing uncertainty about the short term and pushing people to think at a more distant future. At this point, a wise investor will probably see value in those businesses that are undervalued because of market conditions, but the average investor will rather think about self-driving cars, artificial intelligence, online services, and so on… And even if those businesses are losing millions of dollars and have never turned a profit, who cares as long as interest rates are close to zero and more liquidity is coming in from the stock market?
The numbers
A quick look at the numbers is enough to realize parts of the market are overvalued, as we have pointed out in one of our previous articles. The Electric Vehicle market, being probably one of the most overvalued, with Tesla (TSLA) at one point being worth 1170 times its earnings during the summer and Nio (NIO) stock growing 1495% in 2020 while losing US$ 4,12 billion in the first three quarters, is just the tip of the iceberg. Zoom communications, for example, (ZM) currently has a P/E ratio of 848x and is basically just a videoconference app with many competitors that provide exactly the same service. When it comes to the FAANG+ stocks, since February 19 of 2020 Google is up 33.06%, Netflix +41.56%, Nvidia +69.15%, Adobe +19.80%, Microsoft +22.27%, Facebook +17.10%, Amazon +40.87%, Apple +49.55% and Tesla +271.81%. While in some cases these valuations can be partially justified by an increase in revenues because of the pandemic, especially for these biggest companies, we can’t say the same for many other smaller companies that are subject to speculation. Also, going back to normal means a decrease in those activities that thrived in a lockdown context, even if a small part of consumers will not go back because of changed habits. Examples are Amazon, which currently has a price-to-earnings ratio of 78x, and Netflix (89x).
The paradox
Now that vaccination campaigns have started in all of the richest economies and estimates show that we may be able to beat the pandemic in a few months, traditional businesses have been moving upwards while tech stocks have tumbled. Tesla lost nearly 20% of its stock value since the beginning of February, Apple lost 14%, and Amazon 4%. The end of the “stay at home” economy, with the consequent overall rebound, is posing a major threat to tech stocks, that have much less attractive dividends than value stocks and fewer prospects of growth given current valuations. Also, US debt securities now have a 60% higher return compared to pre-Covid19 levels, which means the average investor can get a substantially lower risk investment with a decent yield. This double threat to tech stocks is making them less attractive when the stock market generally becomes more attractive to the average investor.
The end of the party, or maybe not yet?
February has been the month of oil and gas companies, insurance companies, and banks while the NYSE FANG+ underperformed the Dow Jones Industrial Average (we didn’t take the S&P 500 into account because Facebook, Apple, Amazon, Netflix, Google, and Microsoft make up 25% of the index). It looks like tech stocks lost momentum compared to last months and the economy slowly going back to normal is not helping. With oil prices back to pre-pandemic levels, also thanks to OPEC+ inflating the price by cutting supply, and Deutsche Bank estimating immunity in all western economies by the end of October, investors are starting to see the light at the end of the tunnel, while tech stocks may start falling on the weight of their own capitalization. Also, even if the Federal Reserve claims that inflation targets will not be reached until 2023 and there is another stimulus package planned of US$ 1.9 trillion, investors are starting to worry about public debt levels and questioning for how long the US government will be able to keep stimulating the economy and inflating assets.
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