When you think about growth right now in the economy, you think about technology. There are two types of technology companies, the large ones that employ thousands of people and smaller ones that employ tens to hundreds of people.
Even those that are not technology companies (ahem, WeWork) want to be technology companies. Why? We’re not in the dot com boom, but everyone still loves technology companies. The industry has come a long way since the dot com boom and bust. Technological innovations have helped to transform all aspects of life from dating to communication at the workplace.
Companies such as Apple, Microsoft, Uber, Slack, Softbank, and others provide value to consumers and investors in more ways than one. For instance, Apple gives you phones and offers you applications to use on your Apple device. Microsoft sells you computers and owns Minecraft, Linkedin, and Github. Amazon sells everything. Many of these companies have vast ecosystems and empower others to succeed on top of their platforms.
There is no doubt that they can create new products, distribute them through their vast networks, and continue compounding their value.
But there is one pressing concern present with these high flying companies, can they perform and reach their valuations? If so, how long will it take to do so? It’s an important question because these companies command market valuation, provide benefits to many people, and make up a substantial portion of the market.
The point here is that if technology falls, its excruciating. It’s even more troubling when we are already in a weakened state due to COVID-19. Tech stocks corrected slightly and then rebounded quickly after March 2020 and are at record highs.
It’s Not Post COVID-19
COVID-19 is still ever-present. The United States is going back to normal with flights gradually picking up and people are slowly going back to dining in restaurants here and across the world.
But we are not back to normal by any means. The New York Times and other publications note that COVID-19 cases in places such as Texas, Arizona, and other states are accelerating. Hospitals in different parts of the country are showing distress, and even Beijing locked down a portion of its region.
That doesn’t bode well for economic certainty. The healthcare scare is still here, but it seems like Wall Street doesn’t care. The S&P 500 bounced back, and key growth areas still look overvalued even as the pandemic rages across the world. Of course, we have had a massive stimulus program for small businesses, employees, and households. New economic stimuli didn’t just take place in the United States but many nations across the world.
That global stimulus helps to boost confidence.
Still, the fact remains that we’re in a different situation with slowing GDP growth, and everything looks fine from a stock perspective. We know things do not make sense as many are still unemployed and were saved by the federal and state unemployment benefits. Corporations ranging from Uber to Lufthansa did note that they would trim jobs. Bankruptcies and restructurings not only take place in the public sector but also in the private sector. One sees this play out with vastly different companies such as One Web and Hertz.
Tech company valuations remain robust. Again, why does this matter? A steep decline in the market is not feasible. This is in a time when Morningstar noted that technology was overvalued at the start of 2020 from a “price/fair value estimate for the median tech stock. An excessive ratio when compared to 2007.
COVID-19 did help to boost e-commerce, remote working tools, and telemedicine. But even then, investors seem overenthusiastic here as well.
The Narratives Bolstering Tech
Growth will solve everything. That’s the mantra that drives technology today. Lower costs of capital, intelligent employees, structures that help produce products at a fast pace, and broad consumer bases are all aspects of technology that drive technology.
Technology companies portray endless opportunities that they can seize to grow and companies like Amazon, and Microsoft, are making investors believers.
Significant Growth In Tech
Sure, digital transformation is present at an accelerated pace in video games, online learning, mobile use, artificial intelligence, and other emerging tech oriented sectors. Growth in one portion of tech can bolster growth elsewhere. Better chips can improve gaming and other and computing power, creating more products.
Business model changes post-COVID favor technology and increased efficiency everywhere.
2020s Will Be Like the Last Decade Compounded
El-Erian, a bond fund manager, notes that with this current pandemic, we are likely to see the same financial and general environment as the last decade only at a higher level.
If that is the case, then trends like the growth in technology over the past decade will remain and become increasingly relevant over the next decade.
The tech picture looks like this, and there’s more demand for various tech services and products as the world becomes increasingly digital. Companies with strong balance sheets ranging from Apple to Amazon have the capital on hand to acquire valuable companies and invest in themselves. Consumer demand for different areas like online education in places like Chegg, Udemy, Udacity, Youtube, and the other regions is unlikely to die down. There’s seems to be a valuation floor provided by the government and the Federal Reserve.
Further companies such as Walmart and the like that have spent time and money investing in technology have benefitted and will see more benefits as these investments improve consumer to business interaction pay off.
Tech Doesn’t Exist in a Vacuum
Uncertainty in the present world does not bode well for income and consumption. If you don’t earn or earn less, are you going to buy? That’s a problem that applies to individuals and companies. Technology must sell to other industries to keep the growth narrative; it doesn’t exist in a vacuum. Industries such as travel, real estate, oil, and others don’t see massive demand return.
Where do you go in such an environment? You go to the only place that shows promise, even if you must pay a premium for it. It stayed relatively stable during the downturn and then roared back louder after the stimulus. The expectation is that old companies who didn’t think twice about tech updates in the past will move it to top priority. Further, new companies will integrate as much tech to be as lean and effective as possible.
But again, how much do you want to pay for tech? That depends on whether you think current conditions will remain or change, and stocks face reality, take a breather shortly, or keep its current momentum and show that it can grow into valuations.