Punters have been warning about the over-valuation of tech stocks for so long that great fortunes have been made in the interim. Then again, anyone old enough to remember back 20 years will know that tech stocks are not invincible – they can indeed crash. So is the wobble in tech stocks since the middle of February just that – a wobble – or is it the beginning of something bigger? Has the end of the party finally arrived?
Since the middle of February the NASDAQ – the US exchange for tech stocks – has slid by just over eight per cent. Some of the big players – the ‘FAANGs’ -- have fared worse. Facebook is down 13 per cent, Amazon is down 14 per cent, Apple down 17 per cent, Netflix 12 per cent, while Alphabet (Google) has managed to avoid the slide. Top of the fallers list is Tesla, which has slid by 31 per cent. To put this in context, the NASDAQ is still up 70 per cent on the past 12 months and Tesla is still up nearly fivefold. Nevertheless, this is the most substantial slide in tech stocks since the Covid crash of a year ago. Why should they be falling now, and how long could it go on for?
In one sense the fall in tech stocks signifies good news. Money is coming out of tech stocks so that it can be fed into recovery stocks. Overall, stock markets are still doing well, defying warnings that they may be overvalued. The FTSE 100, as well as the Dow Jones, is still pushing as post-pandemic highs. Money is flowing back into bombed-out sectors such as travel and hospitality as the world gathers confidence that vaccines will provide a route out of the pandemic. Meanwhile, the stimulus packages are still coming in thick and fast.
Paradoxically, tech stocks became the safe havens of the Covid recession, thanks to the curious nature of it. For much of the past year they have been able to trade freely while many more traditional businesses have been forced to close. It is not unnatural, therefore, that as we emerge from the Covid crisis – if indeed that is what we are doing – that there should be a rotation back into airlines, cruise operators, bricks and mortar retailers and so on.
But there is a limit to how much we can expect of this. We may still be months away from being able to travel internationally again, and even if a locked-down public does emerge, blinking, keen to splash some of the unexpected savings it has accrued over the past year, many companies will still be carrying large debts built up as a result of the interruption to their business. In any other recession the survivors might be able to look forward to feasting on the business of less well-capitalised competitors which went to the wall. Yet so generous has been the government help over the past year that the number of businesses going bust, in Britain at least, has been at its lowest in 30 years.
And of course, the pandemic will have changed some consumer patterns for good – much more so than an ordinary recession. Therefore, some tech companies which benefitted from lockdown could see a permanent shift in fortunes to their favour. In which case, could the current dip be a good time to load up on tech?
It is always much more difficult to value high-growth tech stocks than it is to come to a view as to what more staid companies are worth, with their relatively steady profits – you are valuing hope and potential. But there is one thing you can value with some accuracy: the discount on investment trusts which invest heavily in the sector. Right now, these are bigger than they have been for some time.
As far as UK retail investors are concerned their biggest exposure to tech stocks is likely to be the Scottish Mortgage Investment Trust, the largest trust listed in London and itself a member of the FTSE 100 (I declare an interest in being one such investor). The price of its shares has plunged 28 per cent since mid-February, nearly as much as those of Tesla, its biggest holding. Yet the net asset value of its shares has fallen much less, so that a premium of 3 per cent in mid-February has been turned into a discount of 12 per cent. This does not happen often with such a popular investment trust. Indeed, barring last March when it very briefly reached 15 per cent, it is the widest such discount in a decade. That looks like good value – unless, of course, there really is a repeat of the dotcom crash around the corner.