If you’re wondering why big tech is crumbling, and if the steep drop makes sense, your best guide is to examine what drove your big jump over the past year. Was it a lasting improvement in your fundamentals or a boost on the court fueled by pollyanna-ish exuberance? We’ve all heard why these shooting stars really deserve seemingly outrageous prices: Technology is the only place to find big growth and big profits when bonds just barely match inflation. Post-Covid America will need a lot more of what they are doing for the new world of work from home. Trillions of cash are parked on the sidelines and ready to join the parade. The Fed will stop at nothing to keep markets high. These are the various reasons, say optimists, why metrics that seem totally out of place actually make sense.
But reviewing the trajectory of the ten most valuable tech stocks suggests something different: a fever that was destined to disappear, or a madness destined to end as they did before in 2000 and 2007. Ultimately, a group of almost the same titans. It went from somewhat high-priced to incredibly expensive in just eleven months, as its prices soared and its overall results showed no improvement.
At the end of September 2019, the players with the highest ratings were, from highest to lowest, Microsoft, Apple, Amazon, Facebook, Alphabet, Intel, Adobe, PayPal, Netflix and Texas Instruments. It’s actually 11 components because the Nasdaq 100 counts Alphabet A and B stocks separately, but we’ll label the group as our Top Ten. (We’ll consider Tesla a tech stock because that’s what its drivers call it, and we’ll use that label to justify its high valuation.)
If you’re wondering why big tech is crumbling, and if the steep decline makes sense, your best guide is to examine what drove your big jump over the past year. Was it a lasting improvement in your fundamentals or a boost on the court fueled by pollyanna-ish exuberance? We’ve all heard why these shooting stars really deserve seemingly outrageous prices: Technology is the only place to find big growth and big profits when bonds just barely match inflation. Post-Covid America will need a lot more of what they are doing for the new world of work from home. Trillions of cash are parked on the sidelines and ready to join the parade. The Fed will stop at nothing to keep markets high. These are the various reasons, say optimists, why metrics that seem totally out of place actually make sense.
But reviewing the trajectory of the ten most valuable technology stocks suggests something different: a fever that was destined to disappear, or a madness destined to end as they did before in 2000 and 2007. Ultimately, a group of almost the same titans. It went from somewhat high to incredibly expensive in just eleven months, as its prices soared and its overall results showed no improvement.
At the end of September 2019, the players with the highest ratings were, from highest to lowest, Microsoft, Apple, Amazon, Facebook, Alphabet, Intel, Adobe, PayPal, Netflix and Texas Instruments. It’s actually 11 components because the Nasdaq 100 counts Alphabet A and B stocks separately, but we’ll label the group as our Top Ten. (We’ll consider Tesla a tech stock because that’s what its drivers call it, and we’ll use that label to justify its high valuation.)
What is remarkable and worrying is that while prices soared, profits slept. Today, the earnings of four-quarters of the top ten are at $ 210 billion. That’s 3.7% less than the $ 218 billion figure in September of last year. So more than 100% of the 41% and $ 4.34 trillion increase came from an increase in prices investors were willing to pay for every dollar of earnings. During those 11 months, the overall P / E of the top ten increased from 28 to 50.1. The stalwarts saw substantial increases in their P / E, with Apple going from 19 to 40, Microsoft 28 to 44 and Alphabet 27 to 35. The addition of Tesla to a P / E of over 1000 and elevated valuations for PayPal and Nvidia ( both around 170x) and Netflix (95x) made the mix much richer
