Here's Why Tech Stocks Could Underperform in 2021
December 22, 2020 at 05:16 AM EST
Every stock is trying to be a tech stock which is reminiscent of the dot-com bubble. Andy Hecht lays out his argument for why investors should consider avoiding tech stocks in 2021.
The global pandemic created a hunger for technology companies. After the initial risk-off period in March, when almost every stock with a ticker fell to lows, technology companies took off on the upside. The sector experienced a boom in earnings. Social media companies, E-commerce businesses, online communications, and entertainment via gaming and live-streaming, and others that people could enjoy from the comfort of their homes saw demand for their products soar. Social distancing and working from homemade technology a vital link to the outside world. The trend in technology companies remains bullish. Even in the post-pandemic world, behaviors are likely to change. Those who had never taken advantage of technology will do so in the future.
Valuations of companies have moved to a level where earnings growth will need to continue to support even higher share prices. While the trend is always your friend in markets, the stocks are at levels that could prove unsustainable, even if earnings remain robust. These days, every company wants to take advantage of what has become a technology premium. The last time this occurred was around the turn of this century when a dot.com designation added value to stocks.
The dot-com tag at the end of the last century
Two decades ago, the technology stock collapse came almost four years after Alan Greenspan warned of “irrational exuberance” in markets.
At the end of the 1990s, almost every new stock coming to market with a technology angle soared. Many existing companies re-invented themselves using “dot-com” as a brand rather than a term reflecting a technology, E-commerce, or online-related business. More than a few companies added massive increases to market cap branding with the “dot-com” tool. Ironically, after the technology bubble burst in the early 2000s, 67 firms that changed their names post-bust to eliminate the “dot-com” found that during the period from a month before the name-change announcement until a month afterward, companies saw their stock prices rise 64% on average.
Technology became toxic in the early 2000s. It took a decade and a half for the tech-heavy NASDAQ to recover losses from the 2000 peak.
As the chart shows, the NASDAQ reached a high of 5,132.52 in March 2000. After the bubble burst, it took until June 2015 to surpass that high. Since then, technology has exploded again, and the index has more than doubled in value. Every company wants its share price to move higher, and in the current environment, a technology angle does the trick.
Perception is everything in markets- The Tesla case
Tesla (TSLA) is a car manufacturer. Tesla makes electric vehicles that replace traditional hydrocarbon fuels with battery power. However, TSLA makes automobiles.
Many analysts have argued that TSLA is far more than a car manufacturer; it is a tech company. TSLA has been on the cutting edge of self-driving technology and other advances. Moreover, TSLA’s CEO, Elon Musk, runs two different companies, The Boring Company and Space X that reflect cutting-edge ingenuity.
However, TSLA makes and sells cars. The company may offer many new bells and whistles, but it sells automobiles. The debate is likely to continue TSLA is a tech company, but in 2020, Mr. Musk became the world’s third wealthiest person because the market considers TSLA a technology company.
The chart shows that TSLA shares closed in 2019 at $88.60 and we're at $695 on December 18. There may be a debate over TSLA’s position as a tech stock, but it acted as one in 2020. TSLA hit a new record high on Friday, December 18.
Mr. Musk is an engineer and inventor. His company’s label as a technology stock has flattered him and provided him with his $145.9 billion fortune.
Are DoorDash and Airbnb tech stocks?
The most recent examples of companies that have attracted massive investment flows are DoorDash (DASH) and Airbnb (ABNB). DASH connects merchants and consumers, and ABNB connects home hosts and guests. DASH is the technological equivalent of pizza delivery and ABNB of the bed and breakfast model in hospitality. These companies are technology companies, given their online platforms. Their products are consumer goods and accommodations.
On December 9, DASH’s IPO price was $102; the stock opened at $182.
The chart shows that the stock was still over $64 above its IPO price at the end of last week.
On December 10, ABNB’s IPO price was at $68 per share.
ABNB shares opened for trading at $146 per share on December 10 and were above that level at $157.30 at the end of last week.
One could argue that DASH and ABNB are technology platforms, but they are also logistics and hospitality companies.
The tech label could become dangerous in 2021
History tends to repeat. The memories of the carnage in technology in 2000 could come back to haunt the sector over the coming years. The sector faces several branding challenges. Governments are not all that thrilled with the economic dominance and power of the leading companies. We have seen governmental moves in the US and Europe to address anti-competitive factors and data access and control. If 2000 is a model for the coming years, companies like TSLA, DASH, ABNB, and many others could rebrand themselves if the technology sector once again becomes toxic.
Sector rotation is a powerful force on the up and downside
Sector rotation reflects the wisdom of crowds. In his 2004 book, James Surowiecki’s thesis was that crowds make better decisions than even the most brilliant individual. Markets are the embodiment of crowd theory.
We often see the best-performing sector during one period become the worst during a subsequent period. There has been no sector of the stock market that benefitted from the 2020 global pandemic like technology. Social distancing and fear of contracting the coronavirus caused most people to remain shuttered at home. Working from home became the norm rather than the exception for many. The pandemic’s legacy is a change in behaviors that favor the tech sector, but valuations have grown to levels where earnings will need to keep pace with share prices.
In 2020, every company with a technology angle received a bonus when it comes to sharing prices. If rotation causes a significant pivot from technology to other sectors, the desire to be a tech business could decline. While companies are not likely to change, branding and perception may undergo a shift just like it did in the aftermath of the 2000 tech bubble. Share prices tend to rise to irrational levels during bullish periods. They fall to prices that can be illogical during bear markets. The wisdom of the herd of market participants will determine if the tech moniker will continue to be a bonus or becomes a toxic label in 2021 and beyond.
Want More Great Investing Ideas?
ABNB shares were trading at $166.16 per share on Tuesday morning, up to $3.14 (+1.93%). Year-to-date, ABNB has gained 14.82%, versus a 15.90% rise in the benchmark S&P 500 index during the same period.
About the Author: Andrew Hecht
Andy spent nearly 35 years on Wall Street and is a sought-after commodity and futures trader, an options expert and analyst. In addition to working with StockNews, he is a top ranked author on Seeking Alpha. Learn more about Andy’s background, along with links to his most recent articles.Here's Why Tech Stocks Could Underperform in 2021 appeared first on StockNews.com