• 화요일, 10월 04일
화요일, 10월 04일

Are technology stocks in a bubble?

Are technology stocks in a bubble?

Picture= Wikipedia

[Newsphopick=Kingsley Lim] When the coronavirus pandemic hit the global economy, it was not entirely clear how it would affect technology stocks. Investors and speculators who have bet on the rise of technology stock during these dire times seem to have had their predictions validated by the rising markets. As the markets corrected by 30 percent during March, it quickly recovered to end on historical highs – at valuations which are a cause for concern.

The NASDAQ currently stands at 11108 points while its trough was approximately 6900 points in March this year. Filled with a bevy of technology stocks, the NASDAQ is a barometer of the health of technology stocks. On the surface of it, it seems as though technology stocks have beaten the virus. But for me as a personal investor, I just cannot get past the valuations. It seems as though we are in the midst of a second dotcom bubble. 

An example of this is Netflix - a company well-known for being the entertainment platform of choice for millions of bored people around the world. As the coronavirus ravages the global economy, we have seen a fall in industrial output and consumer spending in general. However, Netflix has had a good first half, reporting US$6.1 billion in revenues and US$720 million in net income for the second quarter. This looks very good on paper as the company only had US$4.9 billion in revenues and US$271 million in net income for the same quarter in the previous year. 

This represents a growth of around 20 percent from the year-ago period, an outstanding result. If the company had the same run rate based on its second quarter performance, the company would have around US$2.8 billion in net income. Its market capitalisation is US$224 billion. That means that the company is trading at a prospective price-to-earnings ratio of 80 times. 

But here comes caution. Stock prices will only continue to rise when it experiences growth. Could the sudden surge in Netflix’s revenue revert to a mean? If we do indeed get a vaccine, the world will go back to normal and these sudden spikes in revenue will seem temporary in the long run. That is perhaps something to be wary of. But at the same time, I would not pay a price-to-earnings ratio of 80 times for a company. It just seems too pricey for my liking. 

Another example of an overvalued technology company is Tesla. Tesla’s growth story is well documented and its founder, Elon Musk needs no introduction. Elon has brought Tesla from small time car manufacturer for well-to-do hobbyists to electric car manufacturer at scale. The markets have been very fond of Elon Musk and have supported the growth of the business. While the company has experience phenomenal growth since its founding, it is a well-known fact that Tesla had been reporting losses for more than a decade. 

At the same time, the market capitalisation of Tesla is US$277 billion. Is Tesla a car company or a technology company? Perhaps it is an intersection of both industries but there is no competitive advantage to producing electric cars. Other companies are also producing electric cars and this means that Tesla is about to face some serious competition in the space. A market capitalisation of US$277 billion means that the company is worth more than Ford Motors and General Motors combined, but with a smaller revenue base. These valuations do not make sense and we should be wary of it. 

We also have a new entrant called Sea Ltd. The gaming company is the world’s best performing large-cap stock, soaring over 880% in the last 18 months. The Singapore-based company has benefited from the coronavirus pandemic. As the virus continues to spread, gamers are more than happy to consume Sea’s services. It also has an online-shopping platform called Shopee, which has done tremendously well in recent months. 

For the first quarter, Sea Ltd reported approximately US$914 million in revenue, a growth of 57.9 percent compared to the year-ago period. This sudden growth has cast Sea Ltd into the spotlight and made it one to watch for growth investors. 

“Our robust performance through the first quarter and beyond, as we responded to surges in user demands and navigated significant disruption, underlines the fundamental strength, resilience, and adaptability of our business,” reported Sea Ltd in a press release. 

It added “We believe this will, in the long run, enable us to capture the further accelerated and expanded growth opportunities presented to all of our core businesses across our markets.” 

However, despite all this, the company is still loss making. It reported US$1.46 billion in losses but investors are not at all concerned. For that reason alone, it would be wise to act in contrarian fashion, and to be wary of today’s sky-high valuations.

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