Technology stocks: is this the end of the tech dream?

Technology stocks were hyped to extraordinary valuations. Is this the end? Is the game up?

Article updated: 2 January 2019 9:00am Author: Michael Baxter

Technology stocks had a disastrous 2018. Technology also had a pretty awful year in the the court of public opinion.

Ironically, two of the more celebrated stocks with the highest P/E ratios did not perform so badly.

Amazon — P/E around 80 — has seen its share price fall back to a nine month low. Tesla — P/E off the charts — has seen shares surge, recovering most of the losses seen over the last year or so.

By contrast, Apple, with a P/E of just 13 or so, has seen shares fall back to a 15-month low.

It’s been a terrible year for tech stocks — but the share price performance seems largely unrelated to P/E ratios before they started crashing.

Similarity with dotcom era

This all begs the question, are we seeing a re-run of the dotcom crash?

There is an unfortunate parallel.

Back in the year 2000, a dotcom called boo.com went bust. The company had been founded in 1998, had raised $135 million, yet on May 18th 2000 was liquidated.

The psychological impact on the markets was massive — and the collapse of boo.com seems to have been the catalyst for turning investor’s sentiment. Just a few months before the collapse of boo.com, dotcoms were the darlings of both Wall Street and polite dinner party conversations. During the first few months of the new century, there was talk about technology stocks being overvalued. Investors held back, started to observe the market, waiting to see what would happen, and within hours of its collapse, dotcoms began to drop like nine pins.

During the last few weeks of 2018, an exciting British tech that specialised in augmented reality, called Blippar, went into administration. The parallels with boo.com are clear. The company, which was founded in 2011, had raised over $100 million, the most recent fundraising was in September when it secured $37 million.

Will Blippar’s fate prove to be analogous to the the demise of boo.com? Will the technology stocks sell-off in 2018 turn into a rout in 2019, akin to the dotcom crash?

Not evil?

People have stopped trusting techs.

Not so long ago, surveys found that millennials were more likely to trust Facebook with their money than their bank. I wrote about it here enough times, banks had lost trust, techs had gained it — this represented a huge disruptive threat to traditional banking.

Today, it’s the techs that have lost trust.

Actually, the key moment was probably not the collapse of Blippar, rather it was the Cambridge Analytica scandal. The penny has dropped — our privacy is in danger of being taken from us; we risk heading for an Orwellian state — China, with its social credit system is practically there already.

Add to the story, talk of the filter bubble and echo chambers, the way social media and search seems to accentuate bias.

Then add to the story an ever growing body of evidence that smart phones, Google, and the internet in general, are destroying attention spans, ruining our ability to deep think.

Throw into the mix the way certain techs pay such little tax relative to their size, and you have a damning account of tech.

It’s losing trust

That is why Facebook’s share price has fallen 38 per cent since July.

As The Share Centre’s Richard Stone said: “I believe 2019 will see nations starting to take more concerted action to regulate and manage these Tech Giants.”

Is it so bad?

And yet there is Tesla.

For much of last year, it was the company that tech cynics loved to hate. The pressure on the company to start achieving targets was immense — and frankly, the boss, Elon Musk, seemed to be showing the strain, with somewhat odd behaviour.

Yet, the company not only hit the so called impossible target of making 5,000 Tesla model 3 vehicles a week, the company passed it, and then started making a profit.

I could never quite work out in my mind whether Musk was trying to get the company to hit targets by mucking in, making the tea and changing the bins, or walking around the assembly line, whip in hand, flaying anyone who didn’t seem to be performing.

But now Musk’s control over the company has been reigned back, Larry Ellison, the founder of Oracle and one of Silicon Valley’s wisest heads, has joined the Tesla board.

There are key points about Tesla that critics overlook:

  • The company has specialism in AI that no other auto company can match
  • It’s the world’s leading lithium ion battery manufacturer
  • Because they have less moving parts, electric cars are not so hard to make as traditional cars.

The case for Tesla is not proven, its recent profits may be one-offs. It may have met production targets by sacrificing quality. But right now, it looks like Musk pulled it off. “By Jove, Elon Musk has done it.”

And while a case could be made to say that the collapse of Blippar is an sign of an ill wind set to befall technology stocks; the turnaround at Tesla may be a foretaste of delights to follow among technology stocks in general.

In between

We are at an in-between stage.

The tech innovations that led to to smart phones and social media have run their course.

The next phase will centre on AI, voice control, robotics, augmented reality and robotic process automation.

Even blockchain may play a role.

But the technology is not quite there yet. Blippar was too early; augmented reality needs technology advances before it becomes mass market.

Smart phones will be transformed into wearable devices, watches linked to glasses or contact lenses, glasses that provide holographic images so we can interact with people from far away as if they are in the room with us; blue tooth ear plugs that can translate different languages in real-time; wearables that monitor our health and diet turning healthcare from being disease centric into preventive medicine.

But we are not quite there yet.

We are getting close, however, 2019 may well be the year when AI becomes commonplace in business.

Will the technology stocks sell-off continue? Probably. Is an outstanding buying opportunity getting close? Undoubtedly.


These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees

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Michael Baxter

Economics Commentator

Michael is an economics, investment and technology writer, known for his entertaining style. He has previously been a full-time investor, founder of a technology company which was floated on the NASDAQ, and a director of a PR company specialising in IT.