Human nature leads us to be attracted to the most recent outcomes, whether they are positive or negative. While the recent success of high-profile technology stocks has been mind-blowing, it is important to look rationally at these outcomes and how likely they are to continue.
Annualized Returns
The following table illustrates the returns for the Magnificent 7, including the sell-off in 2022:
| Year | 2022 | 2023 | 2024 (through June) |
Total Annualized |
| AAPL | -26.40% | 49.01% | 9.68% | 7.67% |
| AMZN | -49.62% | 80.88% | 27.19% | 6.09% |
| GOOG | -38.67% | 58.83% | 30.15% | 9.96% |
| META | -64.22% | 194.13% | 42.60% | 17.63% |
| MSFT | -28.02% | 58.19% | 19.29% | 13.03% |
| NVDA | -50.26% | 238.99% | 149.50% | 77.66% |
| TSLA | -65.03% | 101.72% | -20.36% | -20.60% |
Source: Yahoo Finance
Notice the significant difference in returns between 2022 and 2023. The table reflects the wide range of return possibilities for these companies.
Growth Expectations
Technology stocks have traditionally traded on the belief in growth. For example, if you believe the growth rate of a stock’s earnings is approximately 25%, then the stock’s earnings should double in three years. The future price in three years should be some multiple of what those earnings are three years from now.
The Myth
While this back-of-the-envelope calculation is great for ambitiously selling a growth stock, reality often paints a different picture. The belief that a company will continue its outsized growth rate for the next three to five years is why Wall Street has a river at one end and a graveyard at the other. In 1999, investors were led to believe growth in technology would continue indefinitely. It was popular to project the most recent events too far into the future. Reality and rationalism had left the building. The projected growth of technology stocks in 1999, based on the most recent history, became a myth. The DJ Technology Index ultimately lost over 70% of its value and took over 15 years to recover.
Plus Ça Change, Plus C’est La Même Chose
The more things change, the more they stay the same. History has given many examples of bubbles created by speculators. Examples include Tulips in the 1600s, the South Sea Company in the 1700s, railroads in the 1800s, radio companies in the 1920s, the Nifty-Fifty bubble of the 1970s, the Japanese asset bubble in the 1980s, and the Dot-com bubble in the 1990s.
It is often said, speculation is an effort, probably unsuccessful, to turn a little money into a lot. Investing is an effort, which should be successful, to prevent a lot of money from becoming little. While technology has had a few years of outsized performance, the overall performance has happened with material downside risk.
The Example
Nvidia is currently the darling of the glamour stock class. After a 50% loss in 2022, the stock has had a multiple of almost 10 times. What had traded as low as $12, now trades at $111. Most of this success has resulted from the sale of its H100 chips to AI initiating firms like Microsoft, Google, Amazon, and Meta. The US government’s defense department is also among the buyers (more to follow on this story).
According to Guru Focus, since Nvidia went public in 1999, the average three-year growth rate in earnings for the company has been 6.77%. The three-year average growth rate for the fiscal year ending in January 2024 was 90%. The current analysts’ average growth rate forecast for the next three years is 51.15%, according to Guru Focus.
The question is whether or not Nvidia can continue this growth rate. This question will be answered in the affirmative if all the stars align correctly. Some of the concerns for this continued growth include: will the moat around Nvidia’s competitive advantage be big enough? The historical answer to this question for all tech companies has been no. Nvidia’s customer base consists of a few very large and powerful tech companies. Companies like Amazon and Google may decide to use other chips to prevent being beholden to one vendor. They may even decide to create their own version of the H100 chip.
This growth also assumes the continued appetite for AI. At some point, the forces of elasticity will take over. Currently, the productivity gains from the billions spent on these chips have value to the big tech companies. At some point, the additional gains from an extra dollar spent on AI will not be worth the risk.
Exogenous Risks
One of the many mistakes people make when analyzing a company is they think they are playing dice when they are actually playing poker. When playing dice, there are 36 possible outcomes and that is all. In poker, there are unlimited outcomes due to the fact you are dealing with the emotional and unpredictable decisions of human beings. A poker player can have a very good hand and lose, or a very bad hand and win. The same is true of stocks. You could have an excellent company, and then forces outside your control decide to take away your advantage. These forces could be political, regulatory, competitive predators, perverse employees, currency issues, and interest rate manipulation.
Conclusion
There is no denying massive fortunes have been made speculating in technology stocks. There is also no denying family fortunes have been ruined by the promises of outsized growth and performance. Is it possible for tech stocks to trade higher? Yes, behavioral forces can drive prices to irrational levels for very long periods of time. Buying most technology stocks is speculating. Like the poker player sitting on a hand at the poker table, the tech buyer is trying to predict the future of human behavior.
One last anecdote: The quote about Wall Street having a river on one end and a graveyard on the other excludes the comment from Fred Schwed, the author of Where Are the Customers’ Yachts?. His comment was, “Yes, Wall Street has a river on one end and a graveyard on the other end, but you are forgetting about the kindergarten in the middle.”