Company / Analytics

Analytics, 14 July 2020

Big Tech stock rallies: is it too late to buy?

The stock market has been steady despite growing concerns over the record number of new U.S. coronavirus cases, driven by a surge in shares of big tech companies. Companies such as Amazon, Microsoft, Apple, Netflix, and Google-parent Alphabet have seen their stocks surge in recent weeks amid the coronavirus pandemic, with their earnings holding up much better than most other industries. But what does the rise of the tech stocks mean for the market? Is it still time to buy? Will the big stock rally last?

Background

The tech-heavy Nasdaq Composite Index has risen to several new record highs as big tech stocks continued to outperform the broader market. The index has gained 18% this year, while the rest of the market remains pretty weak.

Super-tech companies were able to quickly adapt to the pandemic by for instance introducing “virtual” models and shifting employees to remote working. They are also providing most of the essential services needed – food, communication, and entertainment and work from home platforms - needed during the coronavirus induced lockdowns.

Tesla was very instrumental in boosting the Nasdaq after its stock skyrocketed over 250% so far this year and set a new record by rising above the $1,500 per share threshold. Though Facebook is still battling the ad boycott against its platform, investors largely ignored the boycotts and the stock has continued to trade well as most are obsessed with tech stocks and Facebook’s positive outlook. Amazon stock topped the $3,000 mark for the first time on Monday has since maintained that level. Amazon has gained 63% year-to-date basis, compared with the industry’s rally of 42.7%. Amazon is now worth more than $1.5 trillion, joining Apple and Microsoft at the more than $1.5 trillion market capitalization level and the race to be the $2 trillion level.

Investors have historically turned to less-risky assets such as U.S. Treasurys to weather market volatility and uncertainty. But during the Covid-19 pandemic, the market has experienced a huge rotation as investors shift into super-cap tech and shun those groups most sensitive to underlying economic fundamentals (especially the banks).

But banks and industries are often seen to provide a realistic insight into the state of the economy, given their dealing with underlying economic fundamentals; and both groups are struggling. According to Adam Crisafulli, founder of Vital Knowledge, if the big stock rally trend continues, the S&P 500 may suffer a sustained decline.

Is it now too late to buy technology stocks or can the big tech stock rally last?

This is the question facing many investors who feel they have been left by the big tech storm rally as we head into the June quarter earnings season. Others are also wondering whether the rally can last.

Though there are divisions, most analysts believe the stocks could still go further, even as substantial upside remains. For instance, Wedbush analyst noted that the tech stocks could still go another 20%-30% higher despite the fears of a second wave and microeconomic volatility in the coming months.

One interesting thing to note, especially during this time when the COVID-19 pandemic is inflicting huge impacts on the US economy, is that US tech stocks are not solely reliant on the U.S. economy.

Compared to the rest of the world, and for the first time in ages, many wealthy industrialized countries are doing better — and in some cases, much better — than the US. Nations such as Japan, South Korea, and Germany not only have managed to contain the pandemic, but their economies are well ahead of the US’s into their re-openings.

Overseas markets may be a key reason for the surge in shares of the biggest US tech companies. According to a Bloomberg article, big tech companies derive a surprisingly large share of their revenue from foreign markets. For instance, Apple generated more than 55% of its revenue outside the US in the year ended in September; in some quarters, overseas accounted for as much as 60% of revenue. International markets accounted for 54.5% and 53.8% of Facebook and Alphabet revenues, respectively. For Microsoft and Netflix, the split is about half domestic and half overseas (49% and 49.4%, respectively). Amazon is the Big Tech exception, generating a sizeable majority of its revenue within the US, Bloomberg reported.

Overseas is also where most growth is for most big tech companies. Netflix had revenue growth of 21% in 2019, but the domestic side was a laggard at just 7%. Facebook, meanwhile, now has more users in India than in the US, with Indonesia and Brazil growing fast. For Alphabet, Asia and Latin America have produced faster revenue growth than the US.

The big tech companies are virtual across borders at any one moment and will continue seeing growth. Nonetheless, when investing in tech stocks, as with most stocks, one should bear in mind that they are riskier, for instance, in comparison to Treasurys which are often backed governments. Treasurys also give investors a consistent interest payment until they reach maturity, whereas stock dividends are subject to cuts or suspensions at any moment.

Moreover, along with the possibility of higher taxes and new product experiences, tech stocks also face mounting regulation risk, which could put them under pressure, for instance, recent Facebook ad boycotts. These can often affect their future outlooks.

However, we can’t ignore the fact that they are the best pie in the stock market at the moment and are likely to remain so until the pandemic is contained, or even after.

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