Should we invest in Big Tech? Not at these prices

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Big tech stocks are back on a tear after posting huge gains last year.

And that should be a warning to cautious investors that tech stocks are overheating again. Big investors are coming back to technology and dragging retail investors into this risky industry with them.

To illustrate the problem, let’s select a basket of 10 Big Tech stocks – Alphabet Inc., Amazon.com Inc., Apple Inc., Facebook Inc., Microsoft Corp., Netflix Inc., Nvidia Corp., Shopify Inc., Tesla Inc. and Uber Technologies Inc. Certainly, some of these 10 companies, which include some of the world’s most valuable companies by total shareholder value, have performed well in their recent quarters.

But a more powerful factor driving their rise is investor uncertainty over the effectiveness of COVID-19 vaccines against variants of the virus.

Today’s high stock valuations, across the market, are premised on expectations of a robust recovery in the global economy. But continuing outbreaks, many of which are attributed to the Delta variant, cast doubt on the economic boom scenario investors are betting on.

In addition to doubling the value of the Big Tech stock basket last year, investors were looking for a safe haven. And they’ve been rewarded – so much so that the big market players, the institutional investors who have the biggest influence on stock prices, are once again piling on tech stocks, some of which are trading at record highs.

Shares in the Big Tech basket above climbed an average of 125% last year, even excluding Tesla, whose stock price has more than sevenfold.

So, with the possibility of less than dynamic economic reopenings to come, the market has reverted to what it sees as its foolproof Big Tech game. This has pushed up the average price of shares in the Big Tech Basket by 22% so far this year.

Some of us still wonder how this basket of companies managed to become more than twice as valuable in a single year in 2020, before tackling an additional 22% in 2021.

It’s not as if Microsoft, Alphabet, owner of Google, or Shopify in Canada have discovered the fountain of youth.

They are “pandemic winners,” that’s all, companies whose goods and services were well suited to a home economy. Most were able to post impressive, if not spectacular, financial results last year as much of the rest of the economy collapsed.

And since the pandemic was an anomaly, perhaps the surge in Netflix subscription revenues last year will reverse in the looming post-pandemic economy, with theaters, concert halls and bars reopening. sportsmen.

But that’s not how the market thinks. The managers of your mutual funds and your pension fund have taken on Big Tech stocks again because all other institutional investors do.

This is why the stocks in the Big Tech Basket are priced so high, commanding an average price / earnings multiple of about 60 times earnings. (That still rules out Tesla, with its current p / e of 658.)

Most stocks trade within a range of 15 to 30 times earnings.

This phenomenon is called dynamic investing: buying simply because everyone else is doing it. And stack in one area, in this case technology, because everyone is.

Dynamic investing can take stocks to ridiculous heights in times of vertigo and sink them into the ground in times of maximum fear.

As it turns out, tech stocks aren’t a long-term safe haven.

The problems for Big Tech are simple. They don’t seem easy to resolve.

For example, Facebook and Alphabet lack space to grow. They have saturated most of their global markets with social media and internet search, respectively.

Apple and Netflix face formidable competition. Apple lost its leadership in the market for its flagship product, smartphones, to Samsung Electronics Co. Ltd. and Huawei Technologies Co. Ltd.

And since late 2019, Netflix has had to contend with a market it once had with a host of new, deep-pocketed streaming service rivals, led by Walt Disney Co. (Disney Plus), the largest entertainment company in the world. world.

And the only thing stopping a chronic profit-seeking Tesla from sliding down the throat of a major automaker is its ridiculous market valuation. No one in their right mind is going to pay $ 661 billion (US) for this boutique automaker.

In the meantime, giant automakers, whose resources far exceed Tesla’s, will continue to force Tesla to lose relevance with their own ever-improving products.

The luckiest Big Tech companies slide into maturity, becoming robust, slow-growing companies, no longer stock market darlings but stable utilities.

Microsoft is a utility, although its price is not yet modest. A long time ago, Microsoft turned the page in trying to reinvent itself after many failed offers to diversify.

And so, Microsoft’s revenue growth has effectively stalled, hitting around 14% every year since 2017. No longer a growth stock, Microsoft performs well as a monopoly utility that reliably generates a Niagara of cash flow.

Eventually, other big tech companies will realize that their days of dizzying growth are drawing to a close. A look at Amazon’s income statement, which in 27 years has yet to become a substantially profitable business, helps explain why co-founder and CEO Jeff Bezos left the company this year to become a cowboy of space.

While no one has called them yet, the big tech companies have cut their market to investors.

Few tech companies pay dividends. Instead, investors are promised dynamic financial growth.

But a close examination of the companies in the Big Tech basket reveals, for example, that revenue growth has steadily declined in each of the past four years at Facebook and Alphabet.

It has fallen for three of the past four years at Shopify, Netflix, Amazon, and semiconductor maker Nvidia.

Profit growth follows the same ominous pattern across several large tech companies.

Apple is currently the most valued company in the world, at least on paper, with a market capitalization of $ 2.4 trillion (US), a number about a third larger than the Canadian economy.

But with a four-year average annual profit growth of just 6.4% since 2017, Apple follows Vancouver-based yoga clothing merchant Lululemon Athletica Inc. (24.2% annual growth over the same period), retailer Costco Wholesale Corp. (14%), and the Toronto-Dominion Bank (eight percent).

And Apple’s profits peaked three years ago.

It is this decline in performance that should remind cautious investors of once dominant companies like IBM Corp., Hewlett-Packard Co. (now HP Inc.) and Nortel Networks Corp. invincible as Apple appears today.


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