With ASX technology shares joining their US counterparts to trade at or near all-time highs, you might think the biggest share price gains are behind them.
If you own shares in 2020's top two S&P/ASX 200 Index (ASX: XJO) gainers – yes, we're looking at you Afterpay Ltd (ASX: APT) and Kogan.com Ltd (ASX: KGN) – you may even be tempted to sell them. And if you've been sitting on the sidelines waiting for tech shares to retrace from their record highs before buying, you may find yourself waiting for quite some time yet.
According to Nick Maggiulli, the COO at Ritholtz Wealth Management, shares trading at or near record highs is actually quite bullish. Maggiulli says (quoted by the Australian Financial Review):
The data suggests that for many risky assets (stocks, bitcoin, gold, etc.), all-time highs are a bullish indicator, at least in the near term… All-time highs tend to follow other all-time highs. Of course, this process won't last forever, but it can go on longer than you think.
FAANG shares charging higher
Take Apple Inc (NASDAQ: AAPL), for example.
Although shares closed down 1.3% yesterday (overnight Aussie time), Apple hit a new all-time closing high on Monday, gaining 3.6% on the day. Apple's share price is up 85% for the year. And that follows on from a 95% gain in 2019.
Among the recent announcements driving investor interest in the stock is a report that Apple intends to build its own self-driving car. The company is aiming to commence production in 2024.
But it's not just Apple. All the so-called FAANG shares have had a stellar year.
The Facebook, Inc. Common Stock (NASDAQ: FB) share price – still below its September all-time highs – is up 32% year-to-date. That gives Zuckerberg's company a market cap of US$788 billion (AU$1.0 trillion).
And the Amazon.com, Inc. (NASDAQ: AMZN) share price is up 75% year-to-date, making Bezos' company worth US$1.7 trillion (AU$2.2 trillion).
So are these astounding share price gains and mind boggling market caps justified? Well, based on their FY2020 revenues, it would seem so.
According to the AFR, the two companies, together, raked in more than the Australian government:
Facebook and Amazon brought in a combined $US391 billion ($518 billion) in revenue for the last reported 12 months, while the federal government's actual revenue collection for financial year 2020 was $469 billion.
The case for investing in technology shares in 2021
Mark Arnold is the chief investment officer at Hyperion Asset Management.
As the AFR reports, Arnold has been highly successful backing shares that benefit from disruption. And he plans to keep backing those types of shares, like Paypal Holdings Inc (NASDAQ: PYPL) and Square Inc (NYSE: SQ).
PayPal and Square are among the Hyperion Global Growth Companies Fund's largest holdings. And Arnold thinks their disruptive powers could, eventually, supersede traditional banks. With Arnold believing the banks and energy companies (among others) will find it difficult to post regular gains over time, that could prove a drag on the wider indexes.
According to Arnold:
[W]e think the major indices – they'll have a recovery in terms of earnings growth over the next 12 to 18 months – but beyond that, it gets more difficult because you've got a lower growth economic environment…
The indices have already enjoyed the benefit of lower discount rates which are as low as they will go. So, it really comes down to organic revenue growth and then creative disruption and what's going on with the major components of the indices.
The combination of low growth and lots of disruption going on means that the indices are going to find it more difficult over the next five to 10 years in terms of producing attractive returns.
Alex Pollak, Loftus Peak's chief investment officer, is also bullish on the outlook for tech shares in 2021. Pollak says (quoted by the AFR):
COVID-19 has amplified the digitisation of business. The booms in e-commerce, digital entertainment and remote work during the pandemic are speeding up change in business models and creating opportunity…
History is being written as technology redefines business. Investors need targeted exposure to that disruption and an eye on the new companies that will emerge and hit their stride over the next year or two.
Pollak also believes that increased investment in digital infrastructure in the US under President-elect Joe Biden will impact more than just tech shares:
Technology keeps getting kicked up further and further in terms of driving all of the things that are around us… At some point, all that increased demand has to find its own outlet through better and faster chips, more acceleration of digital infrastructure, which ultimately means more Uber cars driving around, more packages being shipped by Amazon. This doesn't just lift our companies, it lifts all companies.
Foolish takeaway
Turning our focus back to ASX tech shares, the S&P/ASX All Technology Index (ASX: XTX) – which tracks 50 of Australia's leading and emerging technology shares – has gained 147% since the 23 March low. That's more than 3 times the 46% gain posted by the ASX 200.
As for the top two gainers of the ASX 200 in 2020 mentioned up top?
Online retailer Kogan's share price is up 158% this year.
And the biggest share price gainer for the year, buy now, pay later darling Afterpay, is up a whopping 287%.
There's no predicting which shares will sit at the top the ASX 200 leader board at the end of 2021. But it's a good bet that tech shares will be in the mix.
To repeat Pollak's quote from above, "History is being written as technology redefines business. Investors need targeted exposure to that disruption."
Happy investing. And happy New Year.
