One year ago, doitinvest.com opinionated that a retreat on the technology shared prices was coming. Now in 2020 the technology shares marched to new heights. The tech-heavy Nasdaq index increased with almost 25% year-on-year, leaving critics scratching their heads. So where did we and other analysts get it wrong?
In my view, there were several factors in play:
** The macro environment changes
The technology advances did not only increased productivity in many sectors, it also entrenched and legitimized many players. FANG companies are now an implicit part of many companies’ strategies and operations. Most services companies are now seeing cloud operations as a must-have.
This mental change in attitudes mean of course more business and revenues for the already entrenched tech players.
** CoVID disruptions
Needless to say, the CoVID pandemic pushed at least 40% of the global workforce into home office. They are of course using technology-heavy tools, from Zoom to MS Office, from Cloud SaaS’es to powerful laptops. This helped the technology leapfrog all others – as skillful modern operations supporters.
** Social Media
We like it or not, the classical media is slowly dying. Even some parts of the media that seem d better than others are now shut down. Cinemas are gone with the Pandemic. Paper magazines moved on tablets. Even mail-in advertising has now a negative connotation – people resemble it to the old Bible sellers knocking at your door and trying to push lots of products to you.
Everything was replaced by the modern online marketing
** Change in investing behavior
The new fintechs also allow customers invest online and more. In a natural way, the new investors are attracted to what is being trumped as the latest fashion – the technology sector. This of course pushes the share prices higher and higher. For example, despite the apparent maturity of the mobile handsets market, Apple exceeded in just three months two milestones in market capitalization 1 trillion USDin May 2020 and 2 trillion in August 2020. The CoVID pandemic exacerbates this: besides lack of consumer spending, many individuals found that they also have time and market accessibility. The route they took was straightforward – they started to purchase shares.
All these factors have created strong demand for the tech shares and as a consequence – pushed them higher. But are they offering sustainable growth?
It looks so.Barely any quarter passes without a new niche being opened up. This Q3 2020 saw the rise of the alternative video making in TikTok and the announcement of the AirBnB IPO. Q2 2020 saw the incredible rise of Apple and Microsoft in terms of profits and market capitalization, whilst Amazon and its online business model was incessantly beating all sales expectations. And the list can go on. If you look at the tech companies multiples of earnings, things are improving, even at these record market capitalizations.
So all in all, it looks like the global technology mammoths are here to stay. What can we do about it? I still think a retreat (or at least a stagnation in share prices will come in 2-3 quarters. Especially when the rest of the economy will adjust to the new working reality and the normal sales channels will work at a constant speed. Let us see…