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Are ASX tech shares in a bubble?

ASX tech shares have been dominating the S&P/ASX 200 Index (ASX: XJO) news lately.

Whether it’s Zip Co Ltd (ASX: Z1P) or Xero Limited (ASX: XRO) making new all-time highs, or Afterpay Ltd (ASX: APT) teaming up with Chinese tech giant Tencent Holdings, there has certainly been a lot of buzz in this sector.

This wouldn’t have been hurt by the fact that ASX tech shares have been amongst some of the best performers since the ASX 200 bottomed out in late March. For example, Afterpay shares have risen more than 800% since 23 March. The Zip share price is also up around 400% over the same period.

We saw a similar pattern over on the US markets. Growth and tech stocks like Tesla, Amazon, Apple, Microsoft and Square have soared since March. Tesla is up around 333% in the last 4 months, whilst Amazon has gained nearly 90% (an incredible move for a US$1 trillion+ company) and Square is up ~233%.

But these kinds of moves tend to get investors’ blood boiling – and not in a good way. According to reporting in the Australian Financial Review (AFR), money is pouring into tech-themed exchange-traded funds (ETFs), both in Australia and around the world.

Are tech stocks in a bubble?

This has been fuelled by the FOMO-inducing performances of the companies above and others – and investors have noticed. For example, the ASX tech-tracking BetaShares S&P/ASX Australian Technology ETF (ASX: ATEC) is up nearly 90% from 23 March, largely due to the Afterpay share price.

The ASX ETF that tracks the US tech-heavy NASDAQ index – the BetaShares Nasdaq 100 ETF (ASX: NDQ) – has also been a winner for ASX investors, climbing 27% since 23 March to a new record high of $25.97 just yesterday.

As has the more globally focused ETFS Morningstar Global Tech ETF (ASX: TECH), also up 27% over the same period.

This stellar and rapid performance has got some investors worried though.

This is some of what the AFR had to say:

“If history is any guide, the tech ETF boom has two inevitable consequences: retail investors joining the tech party too late and getting burned, and issuers launching tech funds to meet demand.”

The AFR also quotes Chris Brycki, CEO of Stockspot:

“History shows the worst time to buy a thematic ETF is when a lot of products get issued in a hot market. Investors want tech and issuers are happy to ‘feed the ducks when they are quacking’… With hindsight, tech ETFs were a great investment a decade ago. It is hard to argue they are as attractive now. Apple and other trillion-dollar tech giants might maintain their growth rates, but it is much harder from here. Most people buying tech shares today are doing so because they have done well in the recent past, which is not a sound strategy.”

Foolish takeaway

It’s hard to argue with these sentiments in my view. There will be some exceptions of course, but I do think that most tech stocks are getting into ‘exuberant’ territory at their current pricing levels. No one wants to call time on a raging party, but it has to end at some point. And you don’t want to be left without a seat when the music does stop.

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Sebastian Bowen owns shares of Tesla. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and recommends Tesla. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of BETANASDAQ ETF UNITS, ETFS Morningstar Global Technology ETF, Xero, and ZIPCOLTD FPO. The Motley Fool Australia owns shares of AFTERPAY T FPO. The Motley Fool Australia has recommended BETANASDAQ ETF UNITS. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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