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Are ASX tech shares like Afterpay (ASX:APT) in a bubble?

A hand holding a pin about to burst a balloon, indicating a crash or drop in asx shares
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ASX tech shares have been some of the brightest stars in ASX investors eyes in 2020. The S&P/ASX All Technology Index (ASX: XTX) is up more than 32% year to date (at the time of writing). That includes the impact of the share market crash/bear market we saw back in March. If you take the index’ returns since 23 March, the returns are even more staggering – more than 127% at the time of writing.

But with companies in this index such as Afterpay Ltd (ASX: APT) rising more than 200% since the start of the year, many investors in the tech space might find themselves getting nervous with money still on the table.

That’s a view that is justified, if reporting from the Australian Financial Review (ASFR) this week is to be believed. The AFR reports that Andrew Brown, fund manager at hedge fund East 72, is reminded of the ‘ bubble’ when looking at the current state of the ASX tech sector. Calling tech valuations “still crazy”, Mr Brown colourfully commented, “at one stage last week, Afterpay was worth more than Coles. I don’t care where you come from, that’s plain stupid.”

Are ASX tech shares ‘stupidly’ overvalued?

According to the AFR, the fundie sees tech valuations as remaining dangerously high, as a cause of ultra-low interest rates and stimulus resulting in “zero-cost money”. He stated the following on this matter:

What it does is take away from people’s valuations disciplines. If you do a discounted cashflow using low-cost money it’s going to come out whatever you want. So people just put a finger in the air and judge the business model. That’s what’s gone on in buy now, pay later.”

Mr Brown foresees 2021 as being a difficult year for the ‘hero companies’ of 2020:

Things started to really pick up for the online retailers around this time last year, with the Black Fridays and coronavirus. So it’s going to get really tough for them as we get into the first and second quarters [of 2021] as they’re cycling off COVID.

Mr Brown is instead looking to what investors might describe as ‘traditional’ value shares. He notes the effects of the Pfizer coronavirus vaccine news, as well as the “steepening in the US yield curve” in the bond markets, that give the opportunity to “buy a dollar for 70 cents”.

He names Seven West Media Ltd (ASX: SWM) as one such share, telling the AFR that it’s “one of those sum of the parts type things you have to do a bit of homework on”. Mr Brown likes Seven because “they have a lot of assets on the balance sheet that might be sold”. If Mr Brown is to be believed, sometimes it’s the simple things that are most worthy of attention.

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Motley Fool contributor Sebastian Bowen owns shares of Pfizer. The Motley Fool Australia owns shares of AFTERPAY T FPO. 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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