In Tech...We Trust? 🖥👏🏼
A couple of pretty phenomenal milestones have been reached over the past week.
You'll probably have seen that Apple became the first American company to cross the $2 trillion market cap level, and the second in history after Saudi Aramco hit the milestone last year. It’s now the most valuable company in the world.
Meanwhile, Tesla shares crossed the $2,000 level for the first time this week - they’re now almost 10x higher than where they traded this time last year, around the $210 level.
These milestones are speaking to a broader underlying trend which has become increasingly obvious this year - Big Tech, for various reasons, is proving to be one of the most resilient corners of the global economy, even while the rest of the world struggles with a pandemic.
This fact has been well documented throughout the year and the stock market seems to be in broad agreement too - just look at share price performance since March 23, when markets hit rock bottom:
Tesla: +391% (!)
Apple: +210% (!)
Along with the Federal Reserve’s quantitative easing and US Congress’ fiscal stimulus, this year’s mega-cap tech rally has helped fire the S&P500 and NASDAQ to record highs.
To illustrate just how much, if we look at year-to-date S&P500 performance excluding the above names (and excluding Tesla altogether given it’s not a member…yet), the index would be down 9% in 2020, bringing it closer to the Eurostoxx 50 which is down around 13% this year so far. Instead, the index has recorded gains of 5% so far on its way to the record highs at which it currently trades.
Just think about that for a minute - the above 6 companies alone have been responsible for an approximately 15% swing in the performance of an index which is made up of 500 companies. And that doesn’t even include Tesla.
Where to from here?
One of the key drivers of this phenomenal rally has been the fact that many investors recognise just how robust Big Tech earnings are irrespective of the broader economic climate. This means investors see these tech names as a kind of stock market refuge - somewhere relatively safe to put money - and are willing to assign higher valuations as a result.
With the broader economy still on its knees and COVID resurgent across a number of countries, Tech names might continue being seen as a relative safe haven for equity asset managers who need to put their cash to work somewhere.
What does this mean for you?
While it feels like there is limited risk of a sudden downward collapse in mega-cap tech names, at these levels it’s also less clear as to whether there’s a lot of upside left in the short term. So if you’ve missed the rally so far this year, it might be wise to proceed with caution if you’re considering buying mega-cap tech now.
On the other hand, if you’ve been invested in these names for a while now, you have a couple of options.
You could take some profit at these levels, but the downside seems relatively limited for now. From an economic perspective these tech giants remain powerhouses, although there could be some regulatory risk ahead in the form of a negative antitrust verdict being delivered for some of these companies in September.
If you’re invested for the long run, even with some potential bumps along the road, the outlook seems positive given the underlying revenue and earnings growth potential of big tech has strengthened over the course of this year, driven by the world being forced to go digital.
In other words, it depends on your positioning (i.e. are you already invested?) and your horizon (i.e. are you looking to trade in the short term or invest for the long term?)
There are others out there
If you’ve missed the rally, or are looking to take some profits and switch into other holdings, there are alternative investments out there. We’ve covered a few in a previous newsletter which you can find here, and there have been a handful of new additions to the stock market over the course of this year too.
A number of interesting companies have made their stock market debuts via IPO this year, and it seems like there are a few more names to come as we get into the back end of the year.
To that extent, we’ve put together a shortlist of 2020 IPOs which you might be interested in looking up - some which have recently happened and others which look likely to come over the next few months:
Exasol - German database management software company. Listed in May.
KingSoft Cloud - Chinese cloud giant, number 3 market share after AliBaba Cloud and Tencent. Listed in May
Lemonade - Consumer-centric, tech enabled insurance provider. Listed in July.
Nacon - French video games and gaming accessory maker. Listed in March.
Rackspace Technology - U.S. cloud computing company. Listed earlier this month.
Shift4 Payments - B2B payments processor, founded in 1994. Listed in June.
Warner Music Group - Record label giant. Listed in June.
ZoomInfo Technologies - no, not Zoom video conferencing which became a household name this year (although that listed last year and has done phenomenally well in 2020). This is a 20-year old SaaS company which serves other businesses’ sales & marketing divisions. Listed in June.
In the pipeline:
AirBnB - confidentially filed for a IPO this week, which usually signals that an IPO is imminent.
Palantir - Data mining and analytics company, founded by Peter Thiel. A 2020 IPO has been in the works for a while, but the company recently signalled it may delay this and opt for a private fundraising round instead this year.
We'll be watching how these and other IPOs evolve, and comparing them to the class of 2019 which included the likes of Uber, Lyft, Zoom but (un?)fortunately not WeWork.
Until next time ✌️
Please know, the value of investments can go up as well as down and you may receive back less than your original investment, meaning, when investing your capital is at risk.
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