It is easy to fall for the lure of technology stocks. There’s enormous scalability, whizzy gadgets and services, and the promise of hefty share price gains to be had. Who doesn’t want to own a piece of the future?
Maybe that’s why the Nasdaq index is now up on the year, whereas every other major global equity index is still very much stuck in a coronavirus fix. Since the start of 2020 the FTSE 100 has lost nearly 20%, while the US S&P 500, Japan’s Nikkei 225 and the Hang Seng in Hong Kong are all down double digits.
By contrast, the Nasdaq has recovered all of its pandemic losses, nudging above the 8,972.60 at which it began the year to 9,014.56.
PROPPING UP STOCK MARKETS
The big tech giants are the reason why. The world’s five largest companies by market value are tech names we all know well, and most of us use. Between them, Microsoft, Apple, Amazon, Google-parent Alphabet and Facebook command a market capitalisation of nearly $5.5trn and produce much of the growth in global stocks.
We have been here before, say critics, and the crash of 2001 was a stark reminder that sometimes expectations are too great for even the most amazing technologies and the companies that create them.
But the difference this time round is that big tech is not being valued on eyeballs, clicks or a whim and a prayer.
CASH, PROFITS AND LOTS OF IT
Today, big tech is enormously profitable, produces mountains of free cash, continue to grow (largely) in double digits and, some even pay dividends. This means that rather collapse with the rest of the market, big tech has actually provided support for the world stock markets and growth, lavishing many billions of dollars in returns to their shareholders.
If nothing else, this performance provides vindication of the value creation potential of an increasingly digital world.
Microsoft, Apple, Amazon, Alphabet and Facebook shares may not charge on forever, like tech goliaths of the past (IBM, Oracle, Yahoo, for example), each may be forced to pass the torch to new companies with new technologies.
In the meantime, with so many traditional homes for cash in tough times - financials, utilities, consumer staples and big income payers - under pressure, big tech may be one of the remaining few safe havens for investors.
