Tech stocks grabbed the investor spotlight during the Covid pandemic. Many gained so much value they reached $100 billion or more in market value without any real earnings. Square, a fintech now called Block, currently has a market cap of $42 billion. Last year Square peaked at a market cap of $162 billion, or 1,000 times earnings. The $162 billion is more than half the market cap of Bank of America, which earned $32 billion last year. Investing in Square at the $162 billion valuation was basically a bet that the 8,000 employees at Square were going to take a lot of business from the 140,000 employees at Bank of America. Maybe this will happen, but whether it was a good bet is a different question.
Many investors became starstruck with the narrative of nimble tech companies crushing old style businesses. We can now call last year’s tech prices a bubble and it’s not quite right to call the deflation of a bubble a panic. Bubble prices don’t return, so there is no recovery from such investments. Many in the tech space flew too close to the sun and like Icarus are falling back to Earth.
The megatech companies are also falling. These are strong companies with good future prospects that simply traded too high during the tech euphoria. Year‐to‐date Meta (Facebook) and Nvidia are down 40%; Amazon has fallen 35%; and Microsoft and Alphabet (Google) are down 20%. These are among the biggest companies on the planet by market cap, so their decline pulls market averages like the S&P 500 with them.
The trigger for the selloff is higher interest rates, which in turn have been caused by persistent inflation. The argument being made by analysts is that higher interest rates are making tech earnings in the future less valuable. This sounds logical, but it’s not correct. Tech companies with strong business models will adjust regardless of inflation or nominal interest rates. Strong businesses at fair valuations will be very good inflation protectors.
The key of course is being a strong business. This is the essence of the lesson learned in the dot.com bust in 2000‐01. Businesses with flimsy business models and little track record of success were bid up to astronomical prices in the late nineties. When prices fell in 2000, there was no recovery for these empty suits. Four out of five of these companies either failed or were sold for pennies, leaving investors who had bought at high valuations with virtually nothing.
This is very different from investing in businesses with strong core earnings. Markets may sell off and the economy may go through a recession, but strong businesses can deploy their earnings to protect their franchise in a downturn and pick up the weak players as the economy recovers. Strong businesses return to their highs and then exceed them. These are the types of companies we pursue in the Ategra Community Financial Institution Fund, LP (Bank Fund) and the Ategra LS500, LP. Sell‐offs unsettle everyone, but they are the best time to find great values, add to positions and lay the seeds for years of success.