Is tech partying like it’s 1999?

Recent 'Big Tech' outperformance has attracted attention that draws parallels with the dot-com bubble. We look past the headlines and re-focus on the fundamentals.

10 Nov 2020

16 minutes

Anton Du Plooy

The fast view

  • A few US technology names have dominated equity market gains this year in a way that has been compared to the tech bubble at the turn of the century.
  • Some see this as a warning that market conditions have become detached from fundamentals and a premonition of more challenging times ahead.
  • Our 4factor framework gives us the confidence to argue that fundamental trends are still supportive, and – in contrast to 1999 – many of these companies are high returning, cash generative businesses with robust balance sheets.
  • Growth prospects and historically low discount rates should be considered when assessing whether valuations are attractive.
  • The global pandemic has only accelerated secular trends that underpin future growth potential, be it remote working, online shopping and entertainment, or cloud computing.
  • We address the risks to the continued dominance of these stocks and ask whether they remain attractive investments.

Are we in a dot-com bubble?

A handful of mega cap technology stocks have dominated equity markets in 2020. This has caught the attention of the media where pundits are quick to highlight the extreme nature of the moves and draw parallels with the dot-com tech bubble. This paper will address those comparisons by looking past the headlines, and through the 4Factor lens, to debunk many of those assertions and refocus on the fundamentals. We then assess the risks and opportunities for investors.

Analysing the quality of business models, valuation levels and operational momentum – as our 4Factor analysis allows us to do – gives us the confidence to remain invested in those stocks that are beneficiaries of strong secular trends. The global pandemic has only served to accelerate some of the trends that will further widen the gap between the digital winners and analog losers.

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General risks:

All investments carry the risk of capital loss. The value of investments, and any income generated from them, can fall as well as rise and will be affected by changes in interest rates, currency fluctuations, general market conditions and other political, social and economic developments, as well as by specific matters relating to the assets in which the investment strategy invests.
Anton Du Plooy
Technology Analyst

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