Is overrated MIT

Crash Fear: Are Tech Stocks Overvalued?

The stock market seems to have decoupled from reality. While there is dead silence in our inner cities, retail and gastronomy are suffering and the pandemic is raging in hospitals, the stock markets are booming. Is that still normal?

Are Tech Stocks Overvalued?

Photo: Author: AndreyPopov

It is hard to believe: shortly after the start of the corona pandemic last year, investors only fell into a moment of shock. Shortly afterwards, the stock exchange launched a whole series of rockets - despite the massive economic slump worldwide. Tesla shares, for example, gained an impressive 770 percent in 2020. Another example is vaccine maker Moderna, which, measured in euros, rose 719 percent in value. The video conferencing provider Zoom impressed with a performance of a staggering 400 percent. Other companies in the cloud sector such as Cloudflare or the online pharmacies Zur Rose and Shopapotheke each recorded an increase of more than 300 percent.

Tech stocks: price losses have not been made up to date

In view of such increases in value, the question arises whether the valuations in the three-digit billion range are actually justified. This is supported by the fact that these companies are well positioned in the current environment. But it is also a fact that up to now they have either posted significant losses or have only just broken even. Memories of the first major stock market euphoria at the end of the 1990s are awakened. Numerous Internet hopefuls crashed brutally after a short soaring on the stock market. The technology exchange “Neuer Markt” collapsed from 10,000 points to 100 points, which was practically a total loss. A short time later the index was renamed TecDAX. Since then, the operators have been happy about the strong growth that has taken place since the introduction. Unfortunately, however, it is also a fact that the TecDAX index has still not made up for the price losses since the "New Market" peaked at the highest level, even after 20 years.

Tech Exchange NASDAQ: Remaking an old story

In fact, there are parallels to what happened between 1990 and 2000: Then as now, the global stock market rally was driven by companies that were listed on the NASDAQ tech stock exchange. And both the rally then and the current rally were - or are - largely supported by private investors. So is it currently a new edition of an old story? Are we currently experiencing a second internet bubble on the stock market? Is there a risk of a crash soon?

There are worrying signs of overheating in the market today. But there are also clear differences compared to the development 20 years ago. There has recently been a massive increase in share prices. But these are not comparable with the exaggerations of the last two years 1998 to 2000, shortly before the crash.

Another important difference to then is the lack of alternatives today. In 2000, interest rates rose sharply in Europe and the US, ten-year government bonds rose to over seven percent and offered attractive returns. Today it looks very different. Ten-year US Treasuries are just one percent. And the yields on German ten-year government bonds are clearly trending in the negative range.

Chart: Nasdaq since 1987

Graphic: Schiller PE ratio

Tech stocks: what the crash prophets say

Crash prophets who speak of a bubble also point to the high Shiller price-to-earnings ratio. The long-term average is around 17. In the meantime, the indicator has reached a historical high of over 25, which was only exceeded in 1929, except during the dot-com bubble. At that time there was a historic stock market crash with the subsequent global economic crisis. However, the current market environment should also be taken into account here. If you do not relate the Shiller Index to the last 100 years, but to a thirty-year average, you can see that the level has risen significantly in recent years, as the market takes into account the lack of alternatives. In this way, one can speak of a high rating - but not of a bubble detached from reality.

Finally, as a lesson from the 2000 dotcom bubble, one should consider the following: The leading key companies of the time, such as Amazon or Apple, were by no means overvalued, but their value has increased more than tenfold since then. So the market was by no means wrong here. What you should pay attention to, however, are the many free-riders who have benefited from the euphoria and have been able to attract numerous investors without ever establishing a sustainable business model. Here, too, we can only advise investors to critically question current high flyers with ratings in the double-digit and triple-digit billion range. Well-positioned quality companies, on the other hand, could continue their growth course on the stock exchange in the next few years with further increases in sales and profits based on the current price level.

Helge Müller is the Chief Investment Officer of Genève Invest in Luxembourg. For he writes columns on private asset management at regular intervals.

Photo: Genève Invest

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