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The Case For Tech’s Infinity Rally
If you've taken anything away from recent discussions in these pages around tech's resilience in the face of the COVID panic, it should be that the sector (or at least the heavyweights) is the main beneficiary of what amounts to a perpetual motion machine dynamic, and that in many respects, the crisis threw that machine into high-gear.
Admittedly, quoting Howard Marks's 2017 essay on this subject is a bit cliché three years on, but it's one of his better expositions, and I feel like it's bec
Heisenberg, so besides fine cigars, what are you long these days?
I’m guessing subscribers…
On one side, the idea that forced acquisition of the top tech stocks by large passive fund managers is a compelling theory. Fundamentals don’t seem to be a real factor … yet. However, increasing the enforced political isolation of the US as practiced by the current administration may be a threat that can break that cycle. Apple needs both the demand and the supply chain of a relationship with China. A lot of the revenue from Amazon is dependent on cheap imported goods. While being cut off from the rest of the world may not be an existential risk, it can really threaten the growth that make the tech giants such high momentum stocks. It is possible to break something that seems unbreakable. Finally, the math is against the infinity machine. Growth by any company at rates above the growth in the overall economy implies the survival of only one company at some point. That seems doubtful.
Whatever. I’m holding GOOGL for another 40 years.
I think I get the case for the current valuations of FAAMG. I don’t agree with it, but I do recognise its plausibility. I also get the case for ‘the other stuff’ being fairly valued. Where I come unstuck is trying to hold both arguments simultaneously. Either the digital behemoths go on to utterly dominate our lives, and ruin much of the remainder of corporate America, or they don’t. In that regard, the parallels with the 90s tech valuations are quite strong. In those days there was an underlying, if somewhat underappreciated, presumption that the ‘new economy’ was somehow additive to the traditional economy rather than substitutive for it. Eventually people realised that was nonsense.
What percentage of shares of FAAMG companies are held in ETFs?
Does it seem as if there is a growing capitulation to the idea that it is foolhardy to stand in the way of US mega tech as they morph into an all-weather status asset?
I follow the strategy of the tech companies and it may be that the market on the outside is valuing them differently than what they really are… and of course lumping all of “tech” together is naive…
– Uber/Lyft/AirBnB etc are the “sharing economy” which touches the physical, they got hammered, never even clear how they got profitable (at least to match valuations)
– Google has almost run out of ways to artificially squeeze ads into search (basically 95% of revenue), have more of an “umbrella company” approach with long bets like Waymo, Verily, etc and are under regulatory scrutiny … FB ditto (milking Instagram) and Libra … both have not managed to crack selling hardware (or anything else besides Ads), they’re almost a Duopoly in advertising and tracking but no “magic growth sauce”
– Apple has won the smartphone/device market (for Google it’s a sideshow data vacuum, it’s a tiny piece of the megacorp Samsung ), they’re dependent on the global economy (and their slow shift into Service/Subscription)… basically China… to see significant growth as a 39 year old hardware company
– Microsoft have rejuvenated really well: they’re targeting Cloud, Developers (github, npm, etc), to continue being #1 for Business (with a taste of consumer via Xbox and Surface), I’m unsure who values a 45 year old company as a “tech disruptor growth bet”
– Amazon is eating everything, unclear if there’ll be a mis-step (only big markets like Healthcare, Fashion, etc remain to make a difference in growth)
– Netflix borrow like crazy, but as Quibi proved even billions of dollars doesn’t count, so it’s probably a growth stock (if you see their crazy good analytics/algorithms, global numbers and vertical integration for content as a huge moat); hyper focused on their one business (and they have “Ads” as a fallback revenue stream at some point in the future) , of course I don’t own NFLX because PE of 85 for “shows” seems crazy =p
So to echo the article, people (or algos?) invest in FAANMG because they’re the new Ford and IBM, but do it at crazy valuations because ZIRP (and the herd crowding at the watering hole can’t be wrong, right?)
Not sure if you’ll see my response, John, but your analysis is absolutely spot-on