Tech stocks have been red-hot for most of 2020, with mega-cap names like Facebook (NASDAQ:FB), Amazon (NASDAQ:AMZN), Apple (NASDAQ:AAPL), Netflix (NASDAQ:NFLX) and Nvidia (NASDAQ:NVDA) all rallying as much as 50% year-to-date as of late August.
Then, in sudden and dramatic fashion, tech stocks reversed course in early September.
The Nasdaq plunged 10% in a matter of days. Nobody was spared in the selloff. All of the stocks mentioned above plunged at least 10%, and some much more.
Many pundits are comparing the current tech stock environment to the Dot Com Bubble of 2000, and are saying that recent weakness is the beginning of a much bigger and longer selloff as the 2020 tech stock bubble pops.
Those pundits are absolutely wrong.
Recent weakness in tech stocks is nothing more than a great long-term buying opportunity.
Here’s five reasons why.
The Economy Is Still Rebounding
The U.S. economy is broadly still rebounding from the novel coronavirus shock.
Consumer spending is on the mend. So is enterprise spending. Same with consumer and business confidence. Consumer mobility restrictions are easing. More physical operations are opening up, with movie theaters and theme parks being the two most noteworthy recent examples. Covid-19 hysteria is broadly fading. Consumers, businesses and legislators alike are all adapting to this new socially distanced normal, by doing things like relocating operations outside and requiring mask wearing.
Importantly, amid all this improvement in economic activity, Covid-19 cases continue to drop, so there appears to be minimal risk of a “second wave” derailing the recovery at this point.
Of equal importance, the U.S. government and Federal Reserve remain exceptionally supportive of the recovery. A new stimulus bill is in the works. There’s seemingly infinite liquidity in the system. Borrowing costs are at all time lows.
All in all, then, the U.S. economic recovery remains on solid footing. Tech stocks are not reliant on a good economy. But they are certainly helped when consumers and businesses are spending more.
This Sell-Off Is Irrationally Driven by Covid-19 Vaccine Hopes
The selloff in tech stocks began on Sept. 2, the same day that news broke that the Centers for Disease Control and Prevention was telling states to make preparations for mass Covid-19 vaccinations as soon as late October. The selloff then ended on Sep. 9, the day after news broke that AstraZeneca’s (NYSE:AZN) Covid-19 vaccine trial was put on hold.
In other words, while the talking heads are going on and on about options trading and excess speculation, this tech selloff is all about a Covid-19 vaccine.
Specifically, Wall Street is worried that a Covid-19 vaccine will normalize consumer and enterprise behavior, lessen dependence on digital and virtualized offerings and actually serve as a headwind for tech stocks.
While I understand that fear, it’s overstated.
Many of the shifts which Covid-19 either accelerated and/or set into motion are permanent, because they are shifts to superior solutions.
Online shopping is far more convenient than physical shopping. Digital payments are far more efficient than cash payments. Hybrid work environments are far more cost-effective than big offices. Streaming TV is far more accessible than linear TV.
We are not going back to the “old normal.” We are sprinting into a “new normal,” which is far more efficient.
The numbers post-vaccine will bear this out. And as they do, Covid-19 vaccine related weakness in tech stocks will reverse course.
Technology Is Disrupting Every Facet of Our Lives
Over the next decade, technology is going to increasingly disrupt and redefine every facet of our professional and personal lives.
Electric vehicles will replace diesel and gas cars globally. Autonomous driving will become a reality. Plant-based foods will take over grocery stores and fast food chains. Shopping and payments will move entirely online. Online gambling and sports betting will get legalized. Data will transform every business operation.
Clean energy adoption will soar. AR/VR technology will revolutionize gaming. Robots will become real, useful things. Cloud computing will become ubiquitous. Space tourism will emerge as a new category of travel.
I could go on and on.
But the point couldn’t get any clearer.
The world is rapidly changing to one where technology influences and dominates everything we do.
To that extent, then, the growth narrative supporting tech stocks is really still in its first few innings of global livelihood disruption.
Valuations Aren’t as Elevated as They Were in 2000
Some bears love to look at the tech sector’s 28-times forward earnings multiple and say — in a super apocalyptic tone, of course — that tech stock valuations are broadly as high as they’ve ever been since the Dot Com Bubble.
But they were much, much higher during the Dot Com Bubble.
At its peak in 2000, the forward earnings multiple in the tech sector was about 50 — or almost double today’s multiple.
Perhaps more importantly, back in 2000, investors were betting on pre-revenue, fairly basic companies like Pets.com to change the world. Today, investors are betting on multi-billion-dollar revenue companies with innovative business models like Shopify (NYSE:SHOP) and Square (NYSE:SQ) to change the world.
That’s a big difference.
So, no, we are not in a tech stock bubble comparable to 2000. Valuations today are much more measured, and the companies investors are bidding up are much more legitimate and formidable, with much, much better long-term growth prospects.
Tech Stocks Are the Best Game in Town
Here’s one big difference between 2000 and 2020 that perma-bears hate to talk about.
Back in 2000, the effective Federal Funds rate was up around 6.5%, and the Fed was hiking rates. Today, the effective Federal Funds rate is down near zero, and the Fed has expressed a commitment to keep rates at zero for a lot longer.
Finance 101 tells you that lower rates are better for stocks for two reasons.
One, they drag down the risk-free rate, which is a key component in the discount rate investors use to value future profits, and thereby inflate the net present value of those future profits. Two, they essentially make the return on bonds less attractive, and therefore, push money into stocks.
So long as rates remain at zero — which they will, for the foreseeable future — risky, growth assets like stocks will outperform. And, when it comes to stocks, tech stocks are the best game in town.
The recent selloff in tech stocks is little more than a valuation gut-check thanks to irrational fears that a Covid-19 vaccine will be bad for technology companies.
It’s nothing more.
So, when I look out today and see long-term winners like FB stock, SHOP stock, AMZN stock, SQ stock and many more trading 10%-plus off recent highs, I simply see a bunch of great buying opportunities.
As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been rated one of the world’s top stock pickers by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm.