WILL THE TECH STOCKS CONTINUE TO RISE?


SOURCE: PEXELS


SUMMARY:


  • NASDAQ 100 is close to all-time highs.

  • Investors are overly optimistic about the potential of big tech companies.

  • Tech Stocks are overpriced and overbought at the moment.

  • There is a potential of the second dot-com crash.


NASDAQ 100 closed at 10,524.01 points on 08/07/2020. The tech rally has propelled NASDAQ 100 to near all-time highs. Entrepreneurs and investors are overly optimistic about the potential of tech companies.


The euphoric attitude of the investors towards the tech companies is alarming. Wall Street’s obsession with the tech stocks at the moment is reminiscent of the infamous dot-com crash, which took place in the early 2000s.


Prior to the dot-com crash, the investors were eager to invest in tech companies, at any given valuation. The same is the case today, the investors are eager to invest in tech companies regardless of their valuation and future earnings potential.


Investors are foolishly ignoring the fundamentals rules of investing in the stock market, such as analyzing P/E ratios, studying market trends, and reviewing business plans. Instead, the investors are too preoccupied with finding the next Amazon or Tesla.


TECH STOCKS BUBBLE 2020


Tech stocks are significantly overvalued and overbought at the moment. There is a massive disconnect of reality between wall street and main street.


We are living in worst possible health crises at the moment, according to Gallup, 65% of the Americans now believe that Covid-19 situation is getting worse, way higher than the low of 30% in early June.


The Chapter 11 filings are continuing to spike, there have been 75 Chapter 11 filings in the past 3 months among companies with at least $50 million in liabilities. Analysts are predicting that 2020 may become one of the busiest years for chapter 11 filings since the great depression. Unemployment is at a record high and there is a risk of the debasement of the dollar due to excessive printing of the dollar, which likely causes higher inflation. Inflation is a market’s worst enemy since it results in a contraction of P/E multiple, a stock’s key valuation metric.


Financial analyst Gary Shilling has made the prediction that the stock market could see a 1930s like decline; obviously tech stocks will not be immune if the prediction comes true.


According to Gary Shilling, the stocks could crash if the economic recovery from the coronavirus pandemic takes longer than expected, so far, the coronavirus is winning, and we don’t have any vaccine as of yet which could stop or control the coronavirus.

The investors have not learned the lesson from the first dot-com crash, and it seems that history will repeat itself. The introduction of social media is fuelling speculation and wishful thinking.

HOW TO AVOID THE DOT-COM BUBBLE 2020?


Benjamin Graham once said “In the short run, the market is like a voting machine. But in the long run, the market is like a weighing machine.”


Companies like Zoom, Shopify, Nikola & Workhouse Group are receiving an enormous amount of attention but the buzz does not mean that they are worth investing in. All these companies are yet to turn a profit. Popular stocks may do well in the short-term but a company with a flawed business model will not do well in the long-run, no matter how popular the company is.


Companies like Shopify, Nikola, Workhouse Group & Zoom are all surging in value on the basis of speculation; investors are hoping that one day these companies will become the next Amazon or Tesla.


Given the fact that Shopify earned $1.58 bn revenue in 2019, but the market valuation is $120.74 bn, there is no reasonable justification or solid numbers available to justify the $120.74 bn valuation. Investors need to be realistic about the revenue growth.


Financial variables such as the company’s overall debt, profit margin, and revenue forecast must be examined, prior to making a decision. A good idea will not always transform into a profitable company.

It is easy to get caught up in the latest trends such as e-commerce, cloud computing, fintech & electric-vehicles, however, it is imperative that you don’t get caught in the hype when making any investment decision. Warren Buffet says’s “price is what you pay, value is what you get.”


Don’t focus on the short-term swings in price; always be focused on the underlying value of your investment. Investing in tech stocks should be approached in the same manner as you would with any other potential investment, with an eye on the balance sheet and profitability and earnings forecast, rather than the perceived popularity.

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