Common sense and experience tell me much of the tech stocks we pour dollars into are hopelessly overvalued and the benefits they claim are massively over-exaggerated. However, the runaway stock market performance of the big tech firms is evidence of just how much the market believes in their worth. Their extreme valuations might be because stock markets became overly speculative during the period of ultra-low rates, or it might just be because stock pickers tend to be more optimistic than naturally pessimistic old bond dogs like me. Since the market’s nadir in the winter of 2022, the big tech firms have performed incredibly. Apple up 64%, Amazon up 60%, Telsa up 162%, and Meta up 219%, for example. These are exciting companies, but I just can’t get enthused about these valuations.
Apple makes good stuff at very high margins and is insanely profitable even though its good stuff does exactly what other stuff does much cheaper. They have a massive cash pile and can keep propping up the stock price with buybacks. The only real question around Apple is longevity. Nothing lasts forever, or does it?
Some of the big tech firms, like Alphabet, Microsoft and Nvidia have benefitted from an association with the AI effect. The froth that believes everything AI will be worth trillions. That may ultimately prove to be the case. There is value in how AI will refine industry and solutions, but these will be selective.
Today Telsa makes very fine cars. Tomorrow it might be making the same cars but someone else will inevitably be making better ones. That is how competition works. Therefore, it does not justify an 80 times PE valuation. Tesla faces growing competitive threats. Elon Musk’s success is showmanship driven. Now its market value is fuelled by the expectation Tesla will solve the battery electric vehicle charging conundrum by putting Tesla chargers across the globe. But, what if advances in battery tech makes Tesla’s model obsolete even doing away with the need for so many charging stations? Current battery tech – which Tesla’s are engineered around – mean EVs are too heavy for many roads, bridges, and conventional high-rise parking while their massive weight limits their range. Toyota has given notice it has developed longer range, fast charging and significantly lighter battery tech that will revolutionise EVs.
Alphabet and Meta for all that we think they are tech making our lives better as search engines or social media have always just been ways of extracting value by monetising users’ data to advertisers. The current twist is that Meta must be enormously valuable because its new counter-Twitter platform, Threads has established itself as the fastest ever social media app download rates in recorded history. Yet the regulatory trend is against them in terms of their ability to continue to collect our data. That’s got serious implications on how Meta continues to monetise itself. All it really is a collector of multiple individual points to advertise to. The easier it is for a user to avoid becoming an advertising point, the less relevance it has.
There is enormous value out there in the world of tech, but it should be in the detail. The value should be in the new firms, the new innovations and inventions that will change the world. Not in milking mature old ideas. There are areas where the world is genuinely advancing. In the next few years, we will see enormous gains in real things like AI use in health care, from cracking fusion, or better battery tech. Potentially even an electric plane or someone solving the multiple electric vehicle inconsistencies. Also, in whole new sectors we haven’t yet spotted.
I reckon the market is overly rosy on the future of tech. Accentuating the positive and eliminating the negative has taken hold these last 15 years. Fuelled by a belief only tech can move us forward. But that’s the point. The reality is new tech moves us forward, not old stuff that’s generally past its sell by date.