The conversation happens daily, now. Pretty near every hedge fund manager who still cares about stocks -- not countries, currencies or bonds, but actual equities -- has decided that tech has become wildly overpriced.
It doesn't matter what these companies do. It doesn't even seem to matter how overwhelmingly profitable some of them are. There is simply an unwillingness to accept the prices these companies trade at. After for several years being lumped in with the tech boom-bust of 2000 it's now not just a given, it's the case.
Most call these stocks guilty as charged. In fact, there's an unassailable linkage; to doubt it is to court ridicule of an endless, you-tube kind that I know can be excruciatingly painful if the negatives pan out. So maybe it is fitting that I, someone open to ridicule over the years, both falsely and at times accurately, try to frame the discussion in some more empirical, less emotional way.
What I want to do, in two parts, is discuss the prospects of the top ten tech performers in the S&P 500 in the first half of the year with an eye toward their compadres back in 2000-2001 -- still the benchmark of a collapse as far as most students of stock history can recall.
Before I go deep, let's just understand that despite many of those who analogize, I actually lived it back then as the creator of thestreet.com in 1995, and a hedge fund manager who had the street cred to be uber-long going into the last month of February of 2000, and then just a plain seller, short seller, and bond holder thereafter near the top in March of 2000.
In other words, my time in the run-up both mirrored the actual stock market and the real dotcom economy back then. So my view has more than just the usual verisimilitude you hear about from those too young to even understand the context of the great rally and crash of that period.
I participated in the Everest-like climb from Nasdaq 2815, in October of 1999, the real basecamp of the ascent, to the summit March 10, 2000 at 5084 and then the collapse to 1611 a year and a month later, fortunately memorialized in these cyber pages for all to see, and unfortunately captured by the explosion and collapse of TheStreet's (TST) price, in simultaneous fashion.
Plus, in fairness, these 2017 first-half winners are all household names for me, as as I have been championing every one for three years as the remarkable digitization, social, mobile, cloud, and artificial intelligence, machine learning, augmented reality and internet of things trends all ascend at an increasingly quickening pace.
First, let's deal with this year's top-ten starting with the best, Activision-Blizzard (ATVI) , up 59% and its doppelganger at number eight, Electronic Arts (EA) , plus 34%. Both companies are deeply at the heart of the all-encompassing worldwide entertainment shift to digital video games. The perception of these two companies as catering to solo-playing, pimple-faced American teenagers is so wrong as to cause the stocks to be chronically undervalued.
(If you want to see why ATVI's stock chart is looking vulnerable, check out technical analysis on ATVI from Bruce Kamich.)
Gamers, in the tens of millions worldwide, with an average age in the mid-thirties, are spending multiple hours a week at terminals, many dedicated just to games fashioned by Activision Blizzard, EA and Take-Two (TTWO) , the predominant makers of this era. (On Take-Two, Kamich says to expect more downside probes).
Three trends drive the use and the profits: superfast chips, chiefly made by Nvidia (NVDA) , amazing games, sent over digitally, with gross margins in the 80s, up from the store-bought physical 60% levels, and the worldwide phenomenon of E-games with international competitions, including U.S. intercollegiate, growing at a pace faster than all other sports.
To have only three games makers competing for viewers, including TakeTwo -- second-best, up 46% -- is rather stunning, and clearly unrecognized. While all three sport price-to-earnings multiples in the high twenties and thirties, their businesses are showing accelerating revenue and profit growth, as well as levels of burgeoning cash that are rarely found, and certainly were never seen during the dastardly 1999-2000 period that wiped out more investors than even the economic collapse of 2008-2009.
These stocks have no resemblance to any of the top 10 winners of the turn-of-the-century go around, most of which were bereft of profit or featured multiples in excess of 10 times these companies' price to earnings varietals. Most of the achievers back then were about to experience a sudden drop off in sales and earnings -- if they had them at all. I could argue that with the coming of age of e-sports, these companies are on the verge of an earnings breakout of truly overwhelming proportions.
Next up is Adobe (ADBE) , of which I have been an outspoken champion, particularly to club members of Action Alerts PLUS, where my trust has had been along for a remarkable run, up 37% this year, with this cloud-based software giant.
Adobe is one of those companies with multiple streams of growing revenue, given its hammerlock on web creativity and commerce. Its software as a service cloud-based model has brought gross margins to an outstanding level, unheard of just a few years ago; sits subscription service gives tens of millions access to building websites that were impossible to build even in 2015.
Adobe is about to have another spurt of growth owing to artificial intelligence aided by Nvidia chips, the demonstration of which, aided by CEO Shantanu Narayen is, frankly, both spectacular and otherworldly. Its accelerated growth and profitability once again took people by surprise, although owing to the recent tech sell-off, its stock no longer captures the gain of the most recent quarter. Adobe is without peer in this business, and has pulled away from the pack in both creativity and commerce.
Again, its price to earnings multiple of 34 appears to be reminiscent of 1999-2000, until you go back and see that it would be among the cheapest stocks of that bygone era.
Next up is Red Hat (RHT) . We had Chief Executive Officer Jim Whitehurst on Mad Money for what is one of the longest stretch of CEOs who have had strong performances during this moment in time, including the 36% gain for its stock in the first half of this year. Red Hat had a step function up in earnings because its software, among so many other qualities, allows for instant shift from cloud to cloud. (On Red Hat, Kamich says to take some profits off the table.)
This is so important when a company like Walmart (WMT) is demanding fealty to Microsoft's (MSFT) or Google's (GOOGL) clouds to combat Amazon (AMZN) , yet adoption of the cloud is just beginning for whole industries including the giant one, health care.
Red Hat, like Adobe and the gaming stocks, is simply misunderstood by a marketplace that doesn't understand the savings of the cloud versus old-fashioned, on-premises computing, widely figured to offer one-quarter of the cost of the old days of information technology.
Rounding out the top five is Autodesk (ADSK) , with a stock, up 36%, that may be the most difficult to comprehend for the layman hedge fund manager, and I patronizingly call them that because most have not even bothered to go out west and meet the execs of these companies, a proud group who distinctly do not cater to Wall Street the way other groups' CEOs tend to do.
The chief factor behind the lack of understanding? Autodesk is 100% enterprise. It allows companies to translate ideas from engineers' imaginations to the computer screens to the real world. It really has this incredibly fast growing market to itself, with the only competition being its own pirated software. That theft trend seems to be coming down as the company, like Adobe before it, is undergoing a shift to a reasonable subscription-fee, cloud-based service.
Autodesk isn't secretive; it is just entirely non-promotional. We have been promoting it after recognizing the same pattern that Adobe underwent when it switched to a cloud model while at the same time lacking any peers in the space. The growth and the lack of competition for computer-aided design and automation makes the 39 price-earnings ratio more palatable than first grasp, even as the elevated valuation makes it, like others on the list, ripe for profit taking.
More to come in this examination of why this generations' winners can make sense versus those of the 1999-2000 travesty.