America’s tech-heavy NASDAQ index has soared effortlessly upwards in recent years. Standing at a shade under 6,000 in early 2017, it had reached 16,057 by mid-November last year.
And then, a correction set in.
December saw some gyrations and wobbles, and the fall resumed in earnest in early January. By 27 January, the NASDAQ stood at 13,353, although it has fractionally recovered to just over 14,000 as I write these words.
Looking at a long-term chart, in terms of the steepness of the decline you have to think of the sort of share price collapses seen as the world went into Covid-19 lockdown in order to see anything comparable.
And inevitably, as interest rates start to rise, fund managers and investment houses are likely to rotate out of growth stocks and move into the fixed income markets — bonds, and treasuries. So it’s rational to expect tech stocks to remain under pressure.
Too big to ignore
Now, I struggle to get excited about some tech companies. Peloton? Zoom? Sure, they have good stories, but do those stories support such lofty valuations?
But here’s the thing: take a look at the NASDAQ 100, and you’ll see many of America’s very largest companies.
The seven largest companies in the S&P 500, for instance, are all tech stalwarts from the NASDAQ 100: Microsoft, Apple, Amazon, Tesla, Alphabet (as Google’s holding company is known), Meta (as Facebook’s holding company is known), and graphics chip manufacturer Nvidia. Further down, you’ll find the likes of Oracle, Adobe, eBay, Broadcom, Electronic Arts, Qualcomm, Netflix, Cisco, Intel, and PayPal — again, all from the NASDAQ 100.
And the pain hasn’t been universally shared. In late January, Netflix’s shares fell over 20% in a day, following a disappointing earnings report. Meta attracted headlines around the world with a 26% fall in a day, which wiped US$230 billion from its market capitalisation — a record daily loss. Yet Microsoft — America’s largest company — escaped fairly lightly, falling just 9%, far less than the overall NASDAQ index.
Tricky to value
Now, it’s easy to be dismissive of tech stocks’ stratospheric valuations.
Take Tesla, which — ranked fourth in the S&P 500 — is America’s fourth-largest company by market capitalisation. That makes it worth more than Ford and General Motors, and also Daimler, Volkswagen, Toyota, Honda or any other automaker.
Is that valuation really justified for a business that has made just over two million vehicles in its entire life? I have absolutely no idea.
But I do know that similar sentiments could have been expressed for pretty much all the tech stocks mentioned above, at similar points in their lives. Microsoft, Apple, Amazon, Google (as it was then), Facebook (ditto) and so on and so on: lofty valuations go with the territory.
Wiring the world
Yet there’s another way to look at all this.
Which is this: tech is the way that things are done these days. Our working lives are dominated by tech, our jobs carried out through smartphones, computers, and software from the likes of Microsoft, Oracle, and Adobe.
When we’re at home, it’s the same: we chill with Netflix or Amazon, listen to music streamed from Amazon on devices made by Apple devices, and shop at eBay and — once again — Amazon. Meanwhile, our kids — or grandkids — are playing games from Electronic Arts.
And quite frankly, I don’t see any of that changing over the foreseeable future.
Meaning that while tech stocks have taken a battering — with arguably more heavy weather ahead, in the short term — today’s share prices may retrospectively turn out to be something of a bargain, for those brave enough to buy the dip.
Opportunity knocks?
Now, let’s be clear. I won’t be buying any tech stocks myself. I already have a fairly sizable holding via the Scottish Mortgage investment trust, plus several investment trusts with portfolios built around the S&P 500.
And at my age, I’m far more interested in income-focused dividend-paying stocks.
But if I were younger — even 10 years younger — I think I’d be taking a serious look at this market. Most of the big brokerages make it relatively straightforward to buy American stocks these days, although you should expect to have to fill in a United States government W-8BEN form at some point.