Tech stocks continue to promise rising returns

Technology stock valuations were a big topic of discussion on CNBC last week which was full of earnings from the likes of Facebook, Alphabet and Amazon.

Expectations were high ahead of the reports from the largest companies in the world, and investors got a mixed bag. Facebook had blowout numbers, Google parent Alphabet beat expectations but saw shares fall, while Amazon had a big miss on earnings, which saw its stock fall slightly.

For Alphabet, it seemed investors were concerned about rising costs. For Amazon, investors appeared to be worried about the big earnings miss.

But I would argue investors weren’t concerned at all actually.

Amazon shares fell 3 per cent after hours. It was a similar move with Google even though the company beat expectations on earnings per share and revenue.

This move is really just investors taking stock, pausing for breath, and seeing a chance to take some profit.

It’s understandable when you look at the runs the stocks have had. Amazon is up 39 per cent year-to-date, while Alphabet is around 20 per cent higher. And it is not really surprising given that the tech-heavy Nasdaq hit another record high last week.

If investors were really disappointed, you would have something similar to Twitter, whose stock crashed over 14 per cent on Thursday.

This is a company which beat earnings expectations but failed to grow users. It hasn’t been able to convince its investors that the growth will come in the future.

This is different to the larger companies: Netflix, Amazon, Google and Facebook. Netflix is planning to spend US$6 billion on content this year. Amazon’s spending was up 28 per cent alone in the second quarter, while Facebook said costs would rise as much as 45 per cent in 2017.

It’s easy to think that rising costs coupled with worries over growth rates of some companies, such as Facebook for example, should raise questions about valuations.

But as one investor told me last week, “forget about valuations, just own the damn thing”.

It’s a mentality that is prevalent across tech investing. The majority of analysts have buy or strong buy recommendations on the large technology stocks and that’s because these companies have convinced investors of their longterm prospects.

As investors, everyone knows that Amazon really doesn’t care about the bottom line,” Michael Yoshikami, the founder of Destination Wealth Management, told CNBC after the e-commerce firm’s earnings

The majority of analysts have buy or strong buy recommendations on the large technology stocks

last week. “What you’re buying it for is top-line growth, revenue growth, market share.”

This stands true for many of the large tech stocks, which have in fairness seen strong revenue growth.

With Facebook, you’re buying into a promise of never ending revenue growth with a user base of 2 billion people and growing.

With Alphabet, investors are hoping that its search dominance coupled with booming areas like cloud and YouTube provide a long-term runway. And with Amazon, well, no sector is out of bounds with this company.

In my last column in May, I made the point that there would be short-term wobbles in tech stocks, but ultimately the rally would continue. It has. And these giants of the world aren’t slowing down.