Another Quarter of Blow-Out Tech Earnings: Not worried about “tech bubble 2.0″

The ‘HBD bull market‘ keeps making new highs, lead by yet another quarter of blowout earnings by Google, Amazon, Microsoft (and soon to be Facebook). The S&P 500 closed at yet another record high (and same for the Nasdaq 100):

On July 2017, I wrote that Amazon stock would keep going up and that it was not a bubble, and on 10/27/2017 Amazon made new highs yet again due to another quarter of blow-out earnings (and another victory for the HBD investing thesis). Despite the insistence by many that we’re in “tech bubble 2.0,” or that the market is overvalued, or that Trump is bad for the economy, this time really IS different, and I refuse to sell. As I explain here, historical analogies don’t always work well. The past and the present may seem very similar, but tiny differences can result in entirely different outcomes. Just because the 2000 and 2008 selloffs were severe and still fresh in people’s memories, doesn’t mean it will happen again (or at least not for a long time).

Due to the unprecedented and newfound resiliency and efficiency of the US economy and capitalism, I’m wagering that it may be years, even decades, before there is another significant correction in the markets, at which point Amazon stock will be at $5,000/share, Google $4,000/share, Facebook $700/share, Nasdaq 20,000 etc. Although these targets may seem absurd, a decade ago the thought of Amazon being worth $1,100/share or Facebook being a $400+ billion-dollar company would have been equally absurd, yet it happened. This is the techno-commercialism that NRx writes about, unfolding before us. It’s not something that is relegated to the fictional worlds of sci-fi; it’s happening right here, right now.

The deniers, similar to the same people who deny the importance of IQ or deny racial and gender differences, say Amazon will never fill its lofty valuation, and yet empirical reality is slapping them across the face. Two decades from now when Amazon controls nearly all of retail, we’ll be talking about how it was ‘so obvious’ that Amazon would be bigger than Walmart and how paying $1,100 a share in 2017, in retrospect, was a bargain. For example, in 2004 Google went public and had a PE ratio of nearly 100; 13 years later, the stock price has increased 20x and the PE ratio is only 30. Same for Facebook in 2013, or Microsoft in in the 80′s [$10,000 invested in Microsoft's IPO would have turned into $10 million, and Microsoft is more profitable than ever]. These companies are initially overvalued by conventional metrics, but then rapidly grow and fill out their lofty valuations.

In 2014, when Amazon was only 1/3 the price is it now, I remember reading the same broken clock articles about how it was a bubble, or how Facebook would never ‘monetize mobile’, or how Facebook overpaid for Whats App. Puh-leeze. You (the doomers, the nay-sayers) being right once does that change the fact you were wrong 50 times before. Even if the market were to crash, the gains are still significant from the 2009 lows, so much so that it wouldn’t matter that much…it would just be a temporary setback and a good buying opportunity.

Why is this time different for tech? Because the tech companies leading this bull market now (Amazon, Microsoft, Google, and Facebook) are much stronger and more dominant than any tech company during the 80′s and 90′s tech booms. These companies have lower valuations, fatter profits, and total market dominance. As I explain in the post HBD & Investing, Part 3 (IQ and the concentration of wealth), the reason why the 2014-2016 fracking bust was so severe is because the individual fracking and drilling companies had such thin margins due to so much competition and so much debt, that when the market faltered, they all crumbled at once. They didn’t have the capital reserves to weather the storm.

From the September 2016 post Amazon, Google, and Facebook: Bigger is Better, in which I recommend Amazon, Facebook, and Google stock, and explain how they are uniquely resilient:

Up until the late 2000′s, major tech companies seem to have a about a decade of solid growth and stock price appreciation, before tapering and contracting or even collapsing (Cisco, Oracle, Sega, Sony, Atari, 3com, Research in Motion, etc.), but nowadays, as of 2004 or so, major tech companies seem to do a much better job at retaining their growth, market share, and share price appreciation.

Software and apps are more resistant than hardware. This explains why Ebay and Microsoft exited the 2000-2002 tech crash nearly unscathed, but hardware companies like Palm didn’t. But also, software, websites, and apps have higher profit margins and are more impervious to obsolescence. But also, and more importantly, during the 80′s and 90′s tech booms there was simply too much competition and too many low-quality tech companies. In the 80′s there were many video game manufactures, and like the fracking bust, when the video game industry soured, many companies folded due to there being too much competition…Same for the proliferation of computer manufactures, like Compaq, Tandy, Gateway, Acer, etc., which experienced a similar bust. In the 90′s, there were many networking and router companies; many e-commerce websites; many external hard drive companies; many ISPs; etc. Websites with virtually no revenues were being valued at over $300 million (compared to today where Google alone generates billions in free cash flow every year). Fast-forward to 2017 and there only three major social networks (Facebook, Twitter, and Whatsapp), a single online retailer (Amazon), and a single mega-ad agency and search engine (Google), unlike in 2000 where you had almost a dozen search engines (Lycos, Webcrawler, Excite, Hotbot, Alta Visa, Yahoo, Ask Jeeves, etc.) and many online retailers (etoys, overstock, pets.com, amazon, etc.). Due to the winner-take-all, bigger-is-better nature of post-2008 capitalism, the entire field has been cleared and consolidated, leaving just a handful of permanent and obvious winners.

So this leads to the next part of the HBD thesis: it’s not just about IQ. High IQ is a necessary but still insufficient condition. One also needs ubiquity and market dominance. Without the latter two, you simply have the Nasdaq 100 index, which is good, but adding the other two criteria makes it better.