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What do investors bidding up tech shares know that the rest of us don’t?

July 30, 2020

The post-boom recovery since the March market led to explosive growth in technology stocks. In particular, companies engaged in software development are going through the restoration of their states. According to SaaS,  valuations of public software companies have more than doubled since March.

Such achievements are pleasant news for start-ups of all scales. For first-time novices, an estimate of the proportion of software helps to provide a welcoming public market for the outputs. And strong public assessments can help steer private dollars in the relevant start-ups by supporting capital inflows. For startups who are focused on software development and especially those who are looking for permanent revenue models like SaaS, this is a surprisingly profitable time.

After-pandemic situation

Self-isolation forces people to use the services of large tech companies for work, shopping, and play, and they are likely to keep this way in the future. The results of the tech giants for the last quarter will partially test this theory. In the meantime, the quotes of their shares are noticeably ahead of the stock market. NYSE FANG +, which includes shares of Facebook, Amazon, Netflix, Alphabet, Apple, Twitter, Tesla, Nvidia, Chinese Alibaba, and Baidu, is up 6.6% by the close of trading since the beginning of the year.

In mid-February, the five largest technology companies accounted for about 20% of the total capitalization of the S&P 500. Therefore, some investors feared that the decline in the value of their shares would increase the decline of the entire market. The five largest tech companies have more than $500 billion in liquidity. They shouldn’t have the same financial problems as companies in other sectors, says Jon Treacy, publisher of the investment newsletter Fuller Treacy Money. With the money, they can also continue to invest in innovation, he adds. The expert forecasts the growth of stock indices in the next 12-18 months and recommends increasing their shares in the portfolio on downturns. The third quarter could be a good buying period, given the likelihood of a correction in the market.

People are more often using the services of tech companies. Thus, in March, the number of visits to the Amazon site increased by over 30% in annual terms, according to Comscore. However, tech giants also have vulnerabilities. Facebook has warned that increased user activity would not protect it from declining digital ad revenue. 

In recent years, tech companies have often been accused of monopolizing and violating user privacy in the US and Europe. The crisis gives them a chance to improve their reputation. Silicon Valley companies were among the first to move employees to remote work and use technology to help authorities fight the spread of coronavirus.

What do investors who buy technology stocks know? 

After the pandemic appeared in the United States, layoffs and rising software sales were the crucial and alarming indicators emerging from the startup community. Since then, the situation has turned around. According to the TechCrunch report in June, start-up layoffs have declined. The outflow of the software recovered to such an extent that the SaaS-oriented companies and enterprises are on the rise.

However, instead of just bouncing back to near pre-COVID levels, software inventories continue to grow. As a fact, the Bessemer Cloud Index, which tracks SaaS companies, has set many records of rising businesses in recent weeks. Venture capitalist makes a forecast of a possible acceleration of digital transformation for some software companies which were advanced by the pandemic situation.

The consequence of such a tendency may be that the total addressable market for the software itself is bigger than previously estimated. The increase in TAM could mean an increase in future sales and more significant future cash flows for some software development companies. This argument helps explain current market enthusiasm for public technology stocks, especially software oriented. The TAM argument is essential for considering if we want to grasp much of the optimism that helps drive technology assessments, both private and public.

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