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A second Tech bubble

By Marius-Cristian Frunza
Weekly Briefs

Tech stocks are going through a prosperous period. Some analysts qualify the recent tech rally as a bubble similar to the 2000 dot-com bubble. The social distancing and the working from home strategy implemented in most big firms amid the pandemic were the main catalysts of this trend. Is this situation sustainable? A halt of the qualitative easing could burst this bubble?

NASDAQ, the leading index of technology stocks is at an unprecedented climax. Its level is 2.4 times higher than its peak during the dot-com bubble. There are many similarities between the current trends in the tech sector and what occurred two decades ago. The enthusiasm around digitalisation is at an all-time high, but like in 2000, a very few understand what digitalisation means. If in 2000, any company with a website had colossal valuation, currently any start-up claiming the use of AI is worth hundreds of millions of dollars.  The significant number of fast track IPOs is a common feature in both bubbles.

The only major difference between the two episodes is the fact that the current bubble is fuelled by the quantitative easing strategy of central banks. QE is impacting the tech industry in many ways. The stock market rush is a direct result of the money printing, but there are many other by-products. Monies from QE are funnelled into the investment industry and ultimately to the Venture Capital sector. VCs pumped and are pumping vast amounts of physical dollars in early-stage start-ups. This type of capital is amplifying the stock bubble and underpins the real risk behind this phenomena. If in the near future, the US administration decides to put an end to QE, not only that stock market will collapse, but also the tech sector may be damaged irreversibly.

Tech stocks are, without any doubt, hot and nice to have items in the short term. But, building a long term strategy entirely on NASDAQ shares exposes the investors to unqualified risk. So, the trend is your friend, as long as a friend does not change his/her mind.

The enthusiasm for Tesla and other bubble-basket stocks is reminiscent of the March 2000 dot-com bubble. As was the case then, the bulls rejected conventional valuation methods for a handful of stocks that seemingly could only go up. While we don't know exactly when the bubble will pop, it eventually will. David Einhorn, American investor

Market overview

Despite a significant correction that occurred last week, the S&P 500 is still higher than it was one year ago. The uncertainty of the expected stimulus package drove the markets into negative territory. The foreseeable no-deal Brexit did not bring any support to markets.

Tesla will be seemingly included in the S&P 500 index, thereby bringing additional volatility. Tesla became the most prominent car manufacturer in the world in terms of market capitalisation. In only a decade, the young unicorn went from rookie position to the status of a global leader. Time will tell whether Musk’s primary company is able to compete with the traditionally established Japanese and German competitors.

Next year should bring many swings in the S&P 500 levels due to Tesla share’s volatility. Trading options on Tesla may not be a bad strategy.

Focus:

Airbnb

Airbnb made its glorious entrance on the secondary market. The first day did not bring a massive jump, but this does not mean that there is no potential for future growth. Why is Airbnb attractive for investors?

Airbnb proved its resilience during the COVID crisis. Many analysts believed that the coronavirus pandemic might hinder the online short-term renting marketplace. But, the reality showed somehow the contrary, especially in big metropoles. Big-city residents started a trend to relocate in suburban areas, and the market for short terms stays in urban areas was covered by Airbnb.

Focus:

Zoom

The COVID-19 crisis hammered the last nail in the coffins of many businesses but made the success of a chosen few. Zoom is one of those technologies that was emergent before COVID and became mainstream after March 2020. The rate of adoption was very high, and except for a few European institutions that are reluctant to use Zoom due to privacy issues, there are not many companies which are not using it. The point is that the growth perspectives are limited. So, Zoom needs to reinvent itself in order to put some colour on its trends.

Focus:

Palantir

Since its IPO, Palantir saw the price of its share almost tripling in value. Palantir started as an innovative company proposing anti-financial crime software, but over its existence, diversified in may areas, where its technology can provide intelligence. Palantir has good growth perspectives in the foreseeable future and is one of the companies that could be a serious competitor to the GAFAs. Thus, Palantir is, for sure a buy.

Market outlook

Dow Jones entered into negative territory and ended the week above 30,000 USD. There are uncertainties about the foreseeable stimulus package, and the market stopped its rally. Moreover, assets managers may rebalance their portfolios and mark the profits for the year-end, thereby amplifying the market dip.

Bitcoin dipped and ended the week above 18,000 USD. The challenge to climb above 20,000 USD is on the table. The significant number of speculators aiming to make a profit in the short term contributed to the market dip.  Bitcoin believers and institutional investors see the potential for Bitcoin to expand. Thus, Bitcoin is becoming slowly but surely a leading asset in the investment, and we expect to see Bitcoin rising towards 20,000 but not earlier than 2021.

General Disclaimer

The information and data published in this research were prepared by the market research department of Darqube Ltd. Publications and reports of our research department are provided for information purposes only. Market data and figures are indicative and Darqube Ltd does not trade any financial instrument or offer investment recommendations and decision of any type. The information and analysis contained in this report has been prepared from sources that our research department believes to be objective, transparent and robust.

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