Investing Advice: Could Technology Underdeliver?

Posted On May 15, 2018 12:03 pm

One common piece of investing advice is the adage that companies should ‘under promise and over deliver’ to keep share prices chugging higher. The alternative of delivering results below expectations can be the death knell, especially for new businesses trying to disrupt or create entire new industries.

So, it’s interesting to note that technology companies which already carry high valuations that imply high expectations seem to take the opposite tack, and promise to change the world on a regular basis.

Whether its in robotics, which even Elon Musk recently acknowledged, “Excessive automation at Tesla was a mistake. To be precise, my mistake. Humans are underrated,”  or in artificial intelligence, which Mark Zuckerberg admitted failed and will be incapable of detecting “fake news,” to say nothing of UBER’s misleading progress regarding self-driving cars, the full promise of technology not only seems still far in the future, but might ultimately never deliver on its potential.

But at the moment, investors still seem enthralled with tech stocks, especially the large cap, winner take all of the FANG stocks of Amazon, Facebook, Google etc.

This group not only represents a whopping 34% of the Nasdaq 100 and a full 19% of S&P 500, but is currently the most over owned group by mutual and hedge funds around the world. 

This could setting the group up for massive disappointment in coming years.

From historically elevated P/E ratios and a rash of global scandals to escalating regulatory concern about tech giant monopolies, there has been constant evidence over the past year that tech’s market leadership is more fragile than it seems. Yet, time and again, tech companies and venture capitalists have renewed euphoria by selling the technologies of the future as imminent panaceas for the technology-driven problems of the present.

Long term, there is little doubting the disruptive potential of emerging technologies, whether it’s robotics, machine learning, or blockchain. However, as Musk’s admission illuminates, the near-term promise of these technologies to generate real-world value has likely been oversold. Hand-in-hand with an E.U. and U.S. regulatory backlash, a seismic sentiment shift toward the technologies of the future could catalyze an equity downturn with contagion implications across the economy.

 Related: Are the Markets Rigged? The SEC Investigates. 

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Steve Smith

Steve Smith have been involved in all facets of the investment industry in a variety of roles ranging from speculator, educator, manager and advisor. This has taken him from the trading floors of Chicago to hedge funds on Wall Street to the world online. From 1987 to 1996, he served as a market maker at the Chicago Board of Options Exchange (CBOE) and Chicago Board of Trade (CBOT). From 1997 to 2007, he was a Senior Columnist and Managing Editor for TheStreet.com, handling their Option Alert and Short Report newsletters. The Option Alert was awarded the MIN “best business newsletter” in 2006. From 2009 to 2013, Smith was a Senior Columnist and Managing Editor for Minyanville’s OptionSmith newsletter, as well as a Risk Manager Consultant for New Vernon Capital LLC. Smith acted as an advisor to build models and option strategies to reduce portfolio exposure and enhance returns for the four main funds. Since 2015, he has worked for Adam Mesh Trading Group. There, he has managed Options360 and Earning 360, been co-leader of Option Academy, and contributed to The Option Specialist website.

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