Zak Mir on New Economy / New Paradigm? Nasdaq, Facebook, Microsoft & Google

One of the conundrums of the year to date, especially if you are a bear of the stock market, has been the relative outperformance of tech stocks, especially in the U.S. While many understandably look to the S&P 500 as being the benchmark of how equities are doing Stateside, it can be said that if there is a leading indicator of bullish sentiment the Nasdaq seems to fit the bill.

Of course, we have been here before. In 1999-2000 it appeared that tech stocks could walk on water and that the traditional valuation model for companies would have to be changed forever. However, as the Dotcom Bubble that soon followed illustrated, we had not discovered a perpetual motion machine, just another example of speculative froth. Indeed, the financial crisis and then the gold bubbles since then showed us how while many things may have changed in the financial markets in the 21st century, price action and human psychology are apparently set in stone as far as a boom / bust cycle is concerned. Or are they?

Maybe there are a couple of exceptions to the rule.

The first is real estate where we have bubbles, but not necessarily crashes, and the second could actually be the aforementioned asset class – tech stocks.

This is because in many instances what is created is something new and something irreplaceable. Much was made of USPs and first mover advantage at the time just before the bubble in technology at the start of the last decade. While part of this idea may have proved to be wishful thinking, we have seen in the example of Skype, Whatapp, YouTube and many others, that the purchaser has been prepared to pay a replacement value for such companies which is nothing to do with profitability. It has been related instead to the strategic important to the business in question – say Skype to Microsoft (MSFT), YouTube to Google (GOOG) or Beats to Apple (AAPL).

But even more key in all these examples and many more is apparently the need to buy such unique concepts so that the competition does not get their hands on it. On this basis the buyer is happy to spend a price unrelated to such minor issues such as price / earnings ratios, or even profits, but just a knockout figure which will get the deal sealed. Luckily for the likes of Facebook (FB) when it recently bought Whatapp, it could get away with a sky high valuation for its target company by paying for at least part of the deal with its own highly inflated shares. This had the rather helpful side effect of affirming the massive market capitalisation it had.

So does all of the above actually mean that there will never be a significant correction for tech stocks?

The answer is almost certainly not. However, my suggestion is that the type of ultra high valuations we have been treated to do seem set to continue. For instance, even in the UK our very own ARM Holdings (ARM), a world leader in chip design and a FTSE 100 constituent has remained one of the companies with the highest p/e ratios amongst blue chips, 50 plus, and this seems set to continue indefinitely.

Is this a correct state of affairs? Perhaps not. But it would be a brave bear who goes or stays short of the shares for long, something that even after all the gains for Facebook, Apple et al, is still very much the case.

GET YOUR FREE COPY OF DOMINIC PICARDA’S GUIDE TO TECHNICAL ANALYSIS – CLICK THE IMAGE BELOW