Michael Pascoe: The tech mania rolls on – we’ve seen this movie before

Michael Pascoe says the performance of tech stocks should not be taken for granted.

Michael Pascoe says the performance of tech stocks should not be taken for granted. Photo: TND

So the tech sector bounced back on Thursday. That’s a pity. The higher and longer the boom, the more who get sucked up in it.

It had seemed September was bringing a smidgeon of sense to the momentum mania that propelled “tech” stocks here and elsewhere to record highs in August, prices so high that they dragged the overall  S&P500 index with them.

And it still might be – dead cat bounces are to be expected as a bubble bursts – or the fever could continue.

It’s not possible to predict irrational behaviour, other than to know at some stage it will unravel.

While the headlines have been full of the American tech sector’s dizzying surge, it was a surprise for me to see that Australia’s fledgling tech index was the world’s best performed by a very long way since the March COVID bottom.

As the Ophir Asset Management co-founders Andrew Mitchell and Stephen Ng explained in their latest newsletter covering last month: “Much of this can be attributed to Afterpay rising a staggering +927% over this period; though Nearmap (+250%), Codan (+176%), EML Payments (155%), Megaport (+151%), Data#3 (+137%) and Wisetech (+135%), Appen (+99%) and NextDC (+75%) have shown the Australian IT market is not a one-trick pony during the market recovery.”

Well, maybe not one trick, but heavily reliant on the Afterpay game.

At Thursday’s close of $75.63 a share, it has dropped 21 per cent from its $95.97 August high – but still has a market capitalisation of $21.5 billion.

That’s, um, pretty amazing for a company that lost $23 million in the past financial year and had EBITDA (earnings before interest tax depreciation and amortisation) of just $44 million.

The share price is based on momentum – it’s going up because it’s going up – and the blue sky potential of the company rolling out its consumer finance product unimpeded.

The share price is based on momentum – it’s going up because it’s going up – and the blue sky potential of the company rolling out its consumer finance product unimpeded.

(Since I last mentioned Afterpay in these pages, NAB has launched a no-interest, no-fee credit card aimed squarely at Afterpay’s target market, an indication of competition to come.

And ahead, when the Reserve Bank resumes normal work, is the likelihood of merchants being allowed to pass on the high fees Afterpay charges them. At present, in something rather like retail price maintenance, merchants are forbidden to do so.)

But Australia’s little tech sector doesn’t add up to a hill of beans in this crazy world, also known as the US market where Apple’s market cap last month was greater than the entire value of the FTSE 100 – the largest 100 UK companies.

British market veteran and commentator Anthony Peters has been watching the tech show with all the scepticism of those who have seen these sorts of movies before, albeit always with acknowledgement of the John Maynard Keynes quote: “Markets can stay irrational longer than you can stay solvent.”

Ahead of Wednesday night’s bounce, Mr Peters observed: “On August 19th Apple broke through the $US2 trillion market cap. Since then it has handed back $US325 billion or, looked at a different way, the equivalent of the sum total of its projected 2021 revenues or one and a half times the market cap of the newly anointed Dow component Salesforce.

“This is a great time for playing with silly numbers. The Big Six were collectively worth around $US5 trillion at the beginning of the year. At their peak a week ago today that number had risen to $US8.2 trillion. As at close of business last night that figure had shrunk to $US7.1 trillion.

“So even after the great September swoon they are still worth over $US2 trillion more than they had been at New Year.

“Optimists see an overdue correction and a probable buying opportunity. Pessimists smell blood and the beginning of the end for the great countercyclical stock bubble. One of them might be right.”

And then there’s Tesla, for which Mr Peters has what you might call a special regard: “Meanwhile Tesla, the bedroom-bound, top-knot sporting geek’s favourite toy, took a 21.06% – not joking – hit yesterday to close down $US88.11 at $U330.21. On Tuesday the stock had closed at $US502.49.

“That said, a year ago you could have bought it at just over $US43 so who’s the fool?

“At the time of writing it had dropped further to $US324.15.’’

Entrepreneur Elon Musk used his SpaceX rocket to launch his Tesla on a course to Mars. Photo: AAP/SpaceX

Among the stunts pulled by Tesla founder Elon Musk has been sending one of his cars (minus the expensive heavy bits) into orbit around Mars.

Tesla’s share price has departed further from the company’s expected earnings than that car has from Earth.

It is simply not possible to imagine Tesla earning enough profit in a reasonable lifetime to repay the top prices for its shares.

That’s the way capitalism was supposed to work – companies earned profits to reward shareholders for taking equity – but that goes out the window when the game is on. The game is called “the greater fool”.

Tesla is not like the Big Six tech giants, the FAANGM made up of Facebook, Amazon, Apple, Netflix, Google and Microsoft.

Unlike many of the Dot.Bomb stars, they are big companies with real businesses and big profits, albeit in the case of Netflix helped by some generous accounting.

(Tesla surprised the market by actually reporting profit in the latest quarter – $US104 million – when a loss was expected. But that profit was on sales of $US6 billion and thanks to regulatory credits. Its market cap is “only” $US341 billion. The price/earnings ratio is too ridiculous to bother calculating.)

Aside from momentum, the greater fool game and money being as good as free while central banks are running the printing presses hard, the justification for buying Big Tech is that it is supposed to be less subject to the economic damage caused by the pandemic.

As Gavekal Research summarised it: “With millions working from home, forced to seek their entertainment from the sofa and obliged to do their shopping over the internet, Big Tech has been the big winner from COVID-19.

“In a world where the biggest fear of investors is that policymakers will decide once again to lock down entire populations, the stocks of Big Tech (and health care) are the obvious anti-fragile assets of choice.”

On the other hand, Big Tech is priced to perfection. Like our little Afterpay, it is possible to imagine regulatory hurdles down the track.

No, not like the Australian government’s attempted heist, as Crikey’s Bernard Keane has described the plan to steal money primarily for the benefit of News Corp and Nine Entertainment, but first by a co-ordinated international effort to tax them fairly and, secondly, by reinserting fangs into US anti-trust law and enforcement.

Both are a way off – they would require a responsible US government to start with – but they are closer than Mars.

In the meantime, there’s the game.

A worry is that there are many rookies playing along at home – people with little or no market experience who think trading is easy, based on their experience since the March low. That hasn’t been the real world.

Topics: ACCC
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