- The tech stock boom is not like the tech bubble of the late 1990s.
- Volatility among tech stocks is near record lows.
- Tech disruption in retail may still be in its early stages.
Technology stocks have produced some of the largest equity market returns in 2017. Can they keep up their rally in 2018? Here are five facts to know about the tech industry heading into 2018.
1. Tech stock valuations are in line with fundamentals
The rally in technology stocks in recent years has led some investors to grow concerned that there may be a bubble forming in the sector. However, looking at the information technology sector’s market capitalization and profits as a percentage of the broader S&P 500, valuations are much more in line with profits this time around. Cash-heavy balance sheets, more modest valuations and a “winner-takes-most” environment also suggest that this tech rally may be different
2. Volatility is near record lows
The technology companies of the 1990s and early 2000s were known for their potential and their risk. The sector as a whole saw dramatic swings in returns during this period as companies shuffled to keep pace with rapid technological advances and as share prices of many hyped web companies outran actual reported results. Today, tech stocks are much less volatile. Technology has become ingrained in daily life, which has led to businesses with more consistent results. It also provides long runways for growth among tech companies. Over the past year, volatility among technology stocks has been relatively on par with the more defensive consumer staples and utilities sectors.
3. Tech disruption in retail may still be early
Technology’s disruption to the retail industry – most notably by Amazon – has been a key theme in recent years. Capital Group equity investment analyst Will Craig recently suggested that we’re still in the early stages of this trend, noting that only one in 10 retail purchases are online. Technology companies still may have ample opportunity to provide the resources for online retailers to continue taking share from traditional brick-and-mortar retailers.
4. The companies of the knowledge economy have become global leaders
There’s been a dramatic shift in the world’s equity markets. Looking back over 10 and 20 years, the largest global companies included some in the energy, financial and industrial sectors. Advances in technology have redrawn traditional business borders, and now five of the 10 largest public companies by market value are technology firms. These more knowledge-based companies are an example of how tech companies have changed investing by creating a truly global marketplace
5. The big players are battle-tested
No single tech company is immune to disruption or competition, but businesses that have withstood tough competition may be better positioned over the longer term. Larger companies such as Apple, Amazon, Alphabet and Facebook are under constant pressure — at times from one another — but have built solid, cash-generative businesses. Combined, these four companies have doubled sales during the last five years and seen net income rise more than 50%. While investors look for the next giant killer in tech, the current giants may continue to thrive.
Equity portfolio manager Mark Casey recently offered his insights into the misunderstood world of tech giants, including the chart above — in the Capital Ideas newsletter. Don’t miss out on this exclusive insight — subscribe today.
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