Mega-cap tech stocks and bubble
The top four constituents (Apple, Microsoft, Amazon and Alphabet) take up about more than 45% of the NADSAQ 100 Index. The below is a diagram representing weight of each company in the NASDAQ 100 Index.To get more news about zentrade, you can visit wikifx.com official website.
As shown above, the mega-cap tech companies, sometimes referred in many different acronyms such as FANG (Facebook, Amazon, Netflix and Google) and FAMANG (Facebook, Apple, Microsoft, Amazon, Netflix and Google), take up so much weights in any given index. If history provides any guidance, then we can have a look at the stock market at the apex of the Dotcom Bubble in the 2000s.
According to a news article, the stock market reached its apex on March 10, 2000, and “Microsoft, Intel and Oracle — a group that earned the moniker ‘the four horsemen’ (with Dell Computer sometimes taking Oracle’s place)—accounted for about 13.9 per cent of the SP 500’s market capitalization.”
The current weight of market capitalization of these mega-cap companies is staggeringly high even compared to the Dotcom Bubble in the 2000s.
Then the question is, will these companies continue to grow and thrive in what is seemingly even greater bubble period than the Dotcom Bubble in the 2000s?
Economies of scale: FAMANG group companies have achieved massive economies of scale that no other companies in history have been able to achieve. For example, Apple has the global supply value chain of a size that cannot possibly be imitated by other companies.
Monopoly status: De facto monopoly status of these companies in the market also paints a bright picture, as historical monopoly companies have thrived well if they were left unregulated.
Profitability: While most of the Dotcom Bubble period companies were nearly non-profitable, lofty valuation of FAMANG group companies can be justified because they do make money, and thus are profitable.
Regulatory risk: There is a significant regulatory risk for FAMANG group companies. For example, Amazon has been getting political pressure because they effectively monopolize a number of different industries, including online retail.
Technological disruption risk: Technological development is taking place at such a rapid pace that no expert can accurately predict what is going to happen in the following years. As such, even leading technology companies can be displaced by competing firms at any time.
Rise in interest rate: Global economy is accustomed to a perennially low interest rate since the Global Financial Crisis in 2009 and COVID-19. Low interest rate has boosted the valuation of big tech companies because low discount rate makes the value of expected cashflow in the distant future more valuable today (you can refer to discounted cash flow model to understand this concept better). If and when interest rate rises, then the value of tech companies would inevitably decrease.