Tech Is In La-La Land

Technology has rallied strong in recent months and particularly the past few weeks with the Invesco QQQ ETF up now over 20% YTD even as broader indexes remain still down. Much of this rise is well-merited as technology was much better positioned to take the sudden COVID-19 business disruption than other industries due to the nature of its business model and the huge cash reserves many technology companies had on hand.

Yet I think the tech rally has reached some of its last legs for the moment because its valuations have soared far beyond what is justified based on current business and economic projections. Times are good for tech but it has gotten a bit ahead of itself, trading on hopes far further down the line and with a premium due to a lack of other safe sectors, and I believe soon enough its current rate of growth will slow and perhaps even reverse for a time.

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Data by YCharts

Much of Technology's Rebound Is Warranted

In mid-March, I stated repeatedly that technology was likely to outperform other sectors due to their more impact-insulated business models amid the pandemic and their huge cash reserves and since then this has proven true and remarkably so.

(Click on image to enlarge)

Chart

Data by YCharts

Some technology companies like Netflix and Zoom are seeing increases, even if just temporarily, in core business due to developments such as increased work-from-home and general lockdown orders. Yet these tech companies, whether lockdown friendly or not, skyrocketed during the shutdowns and now during re-opening and which means clearly there was and is a greater buying push towards them besides the impact of the closures on their operations.

I believe the fundamental driver right now towards the technology sector is essentially finding safety in and paying a premium for, quality. Bankruptcy reorganizations are soaring at a horrifying pace as even companies whose businesses weren't totally shut down before or now still experiencing unbearable financial strain. This has made it extremely difficult to determine which companies are unlikely to go through equity-destroying bankruptcy reorganization or may face the long-lasting albatross of historically surging corporate debt. Investors, therefore, are searching for companies where they don't have to worry about potentially business-ending trauma and seem to have been and are willing to pay an elevated price-to-earnings multiple premium for that as compared to past years.

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Disclosure: Short QQQ

Disclaimer: These are only my opinions and do not constitute investment advice.

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Alexa Graham 7 months ago Member's comment

Good read.

Moon Kil Woong 7 months ago Contributor's comment

Tech has been less affected from Covid and semis have done well as people chose to upgrade their home systems during Covid. That said, it may be a little overdone depending on how things pan out. A lot of the channel built back up stock and we'll see how long it takes for them to push it out in the next few months.

Adam Reynolds 7 months ago Member's comment

I disagree, I think COVID-19 has been a Zoom for tech companies - most tech companies are able to work remotely, and can continue to grow while many other companies have had to completely[practically shut down.

It's also been a boon for new customers and clients as many companies and individuals have had to find new high tech solutions to deal with this unprecedented time. And many traditional folk, who have never shopped online, used an app or used other tech features, have been forced to do so for the first time. Many have since embraced it.

Moon Kil Woong 7 months ago Contributor's comment

Indeed you are right that the online shopping market has done well as evidenced by Amazon and Google. As for all of tech, we will see if tech hardware can push through their inventory build and reorder strongly or not.