What is peculiar about tech stocks?

Tech stocks have had quite the ride over the last year. With all the pandemic and all, technology companies played a very crucial role to continue to turn the wheels of the world. Had the pandemic occurred before the rise of tech as in the case of the black plague or even just before the tech boom in the late 90s, things would have been very different. The whole world would have come to a stop. No trade, no banks, no groceries, no hope for a vaccine for at least a couple of years! That would have had a devastating effect on the social, economic and even cultural foundations of the world.

Thanks to technology, we did not have to completely shut down activities. Meetings and classes could be carried over Zoom, Microsoft Teams or Google Meet or any other platforms, groceries could be ordered online which would then be delivered to your house, heck you can even OWN digital art! Not to forget, technology enabled companies to come up with a vaccine in record time – just over 7 months.

This huge impetus due to the advancements in technology and people’s realization of that can be easily identified from the rally of tech stocks over the past year. When most of the traditional businesses were down for the most part of the first half of the lockdowns, their tech substitutes reached a whole new level. For Example(for the lack of a better example), AirBnB had a good initial pop on its first day after IPO in December. At that point in time, it’s market cap was greater than the combined value of mega hotel chains- Marriot, Hilton and Intercontinental!

Let’s look at it from another angle; valuations of Tech startups. They are just ridiculous! Startups which are burning cash like anything at present, most probably, will have investors pouring more funds into it if it has a good narrative. The key word here is The ability to SCALE. Take for instance, the case of the Indian fintech startup CRED. The credit-card payments app, which was recently valued at $806 million, posted a loss of $49.6 million on operational revenue of a mere $71,800 in fiscal year 2020. Fast forward just 2 months and it is valued at around $2 billion at the time of writing!
This is the main reason that VALUE investors like Warren Buffet has less exposure to tech stocks.

The Tech heavy NASDAQ was the best performing Stock Index in the whole world since the all time lows in March 2020. By late January, It had rose about 90% above the pre pandemic level. But, it is also prone to go down due to some factors. One being higher returns on fixed instruments. Enter US Treasury Bonds! The increase in bond yields during Feb 2021, drove the NASDAQ down as rising bond yields reduces the allure of equities in general and highly volatile tech stocks in particular!

NASDAQ through 2020

Another victim of the effect of increasing bond yield was Ark Investments’ Flagship Fund – Ark Innovation ETF (ARKK). It rose about 200% till Feb 2021. Thereafter fell about 20%. It’s major constituents are Tesla, Roku and Square among other tech stocks. Full list here. Out of them, just Tesla lost up to double-digit percentage in value for days on end.

Shreesha S
Shreesha S

Shreesha is a Qualified Certified Management Accountant(CMA) and Certified in Strategy and Competitive Analysis(CSCA).

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