The forward price-earnings ratio for the S&P Information Technology subsector now stands at 19, compared to nearly 60 at the peak of the late 1990s bubble era.
There are lots of reasons to think the sector is overvalued. For one thing, Apple can’t get away with paying $200 for components and selling them as a $600 smartphone forever. Another is that the tech giants may be wasting vast amounts of money on science-fiction projects that will never work, for example in Artificial Intelligence, the fad du jour.
Unlike 2000, when investors bought startups with the highest burn rates, the tech companies are dowdy, stable monopolies that throw off a great deal of revenue. Their monopolies may fray at the edges and in some cases disappear over time, but they are not going to evaporate overnight.
Last week’s wild price swings have more to do with the mechanics of computer-driven momentum trading than with any reassessment of company fundamentals. Asia Unhedged is suspicious of the sector but doesn’t see any reason for a market crash. Old monopolies never die; they only fade away.