Show Transcript
In 2020, a number of smaller tech companies saw their share prices soar during the pandemic. Will these new names continue to shine or will ‘big tech’ retake their dominance and power markets higher in 2021? Kim Parlee speaks with Vitali Mossounov, Global Technology Analyst, TD Asset Management.
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Vitali, always great to have you with us. I want to jump right in. I know you've brought some charts for us to look at. And one of these is on technology estimate revisions in 2020, because I think there's a perception that all tech stocks did very well during the pandemic. And you want us to take a look at the fact that that may not in fact be the case.
That's exactly it, Kim. It's a popular narrative because you've got the Zooms, you've got the Shopifys, and they did so well so everybody talks about them. And it creates for great media. But in reality, if you look at this chart-- and this chart really just is how many billions of dollars did tech companies either gain from the pandemic as a tailwind or lose as a headwind.
You can see Shopify and DocuSign. These companies gained a few billion dollars-- three, to be precise. And we all talk about that all the time. But the big tech companies, like the Microsofts, the Ciscos, they lost $16 billion due to pandemic. So really, the big story should be that, hey, pandemic, that's a headwind to tech. What's going to happen in '21?
All right. So I'll bite. What is going to happen in '21? When you see the economy reopening, do you think that investors should focus on tech or, what I'm listening to, it should be more focused on the reopening themes, like the airlines and the hospitalities?
Well, there's probably something for every portfolio, and depends on the investors. My message in what I was hinting at, and so I'm glad you followed my lead there, is that, look, the majority of tech companies are going to be in this reopening play. It might not have the torque, so to speak, of an airline, but we think 90% of a tech index, a tech ETF, does benefit from reopening.
And that's a very important consideration. And so investors should step back and say, hey, why do I own these companies? They're disruptive, superior business models, and can they outperform over quarters and years? Yes. Do they benefit from a healthier economy? Absolutely.
Now, I know you were quite involved with a technology ETF called the TD Global Technology Leaders Index. The ticker is TEC. When you take a look at this-- and again, this is an actively managed ETF-- what technology sectors do you think look the most promising?
Well, it's interesting because you rank all the sectors in terms of who are the secular winners that were immune to the pandemic and who were the ones that perhaps were hit a little more and so have this, again, so to speak, torque heading into '21. Some of the more interesting areas are, A, semiconductors, and so really these chips are hardware that goes into, well, a whole bunch of things. The data centers that are responsible for hosting and transmitting this call, could be your car, could be factories and the equipment in those factories. And of course, as the global economy ramps up, semiconductors-- which are about 20% of that ETF benefit.
And then digital advertising. The easy layup ones, the Googles and the Facebooks-- two dominant companies that are really very much about the economy being healthy, businesses advertising, and consumers buying. So that's another two companies that's a big portion of ETF that stand to do very well.
All right. And just if I could, just the semis, I know we've been hearing-- every headline I see, is we're seeing impacts of a shortage of semis not being available for everything right now, as well.
That's right, and that's another big demand signal that we're getting. And we're really getting it from just about every semis company. And there's so many layers to this that I think we'll have to do a whole other segment. But you've got geopolitical considerations between China, Taiwan and the US. You've got this rising demand, you've got supply chain disruptions and interruptions. And so that's another incredible story, but it is very much a recovery play for the post-pandemic world.
You mentioned some of the big names, like the Facebooks and I'll say the ones that are attached to advertising and the opportunity there. And it feels like in 2020, amongst everything else that was going on, there was a bit of a wake-up call with regulators about the dominants of the tech sector. And I know. I've spoken with you and many others about this has always been a concern as they get bigger and bigger. But it seems to have come home to roost in 2020. So what is that going to mean for 2021 in terms of what you see with those big players?
Well, it's a dangerous topic because we can get caught up in the nuances so much. But I really propose we zoom out a little bit, take a step back, and ask ourselves, look, what happened between the 2016 election, the 2020 election? What happened is that these companies cumulatively paid tens of billion dollars, billions of dollars in fines. They were in front of Congress all the time. There's new strict and stringent regulation against them in Europe.
And yet, they continue to grow sales, they continue to grow earnings, and these stocks grew by an average of 24% per year. So all in good show, it's like this was like a big circus you could observe and still get paid very well for attending the circus.
We look for it now. Yes, regulation is here. Arguably, there's more on the plate today. But the businesses are still monopolies, duopolies doing really well. We don't see any imminent threat. And these businesses, we think, have another good four years ahead of them for this cycle.
What about valuation? I mean, the one thing that-- I mean, I know we saw a steep sell-off in March. Things rebounded. But I think Tesla is now worth more than the next six biggest car companies combined. Airbnb is now worth about one third as much as the largest 25 public hotel chains. I mean, they're getting pricey.
Some things are getting pricey, and it's definitely the number one cause of concern. There's no reason to press the panic button, I would say. And the reason is, as we look across and put things into buckets, like valuation and quality of businesses, you take an ETF like TEC or the broader tech index, 90% of things out there-- and we'll point to the Amazons or the Microsofts or the Apples-- they're trading on fundamentals.
They are trading at reasonable valuations, and many of them, we think, are actually undervalued. There are these pockets where I think investors are doing a lot of concept investing. They're betting on certain end states but forgetting to assign probabilities. And usually, in a lot of these concepts, the probabilities are that these businesses will fail.
And so this is a risk, but it's still a small pocket of the market. But probably it's the number one topic you and I should revisit in a few months.
And we will. Vitali, we'll have you back and we'll talk just about that. Thanks so much.
See you soon, Kim.
[MUSIC PLAYING]
That's exactly it, Kim. It's a popular narrative because you've got the Zooms, you've got the Shopifys, and they did so well so everybody talks about them. And it creates for great media. But in reality, if you look at this chart-- and this chart really just is how many billions of dollars did tech companies either gain from the pandemic as a tailwind or lose as a headwind.
You can see Shopify and DocuSign. These companies gained a few billion dollars-- three, to be precise. And we all talk about that all the time. But the big tech companies, like the Microsofts, the Ciscos, they lost $16 billion due to pandemic. So really, the big story should be that, hey, pandemic, that's a headwind to tech. What's going to happen in '21?
All right. So I'll bite. What is going to happen in '21? When you see the economy reopening, do you think that investors should focus on tech or, what I'm listening to, it should be more focused on the reopening themes, like the airlines and the hospitalities?
Well, there's probably something for every portfolio, and depends on the investors. My message in what I was hinting at, and so I'm glad you followed my lead there, is that, look, the majority of tech companies are going to be in this reopening play. It might not have the torque, so to speak, of an airline, but we think 90% of a tech index, a tech ETF, does benefit from reopening.
And that's a very important consideration. And so investors should step back and say, hey, why do I own these companies? They're disruptive, superior business models, and can they outperform over quarters and years? Yes. Do they benefit from a healthier economy? Absolutely.
Now, I know you were quite involved with a technology ETF called the TD Global Technology Leaders Index. The ticker is TEC. When you take a look at this-- and again, this is an actively managed ETF-- what technology sectors do you think look the most promising?
Well, it's interesting because you rank all the sectors in terms of who are the secular winners that were immune to the pandemic and who were the ones that perhaps were hit a little more and so have this, again, so to speak, torque heading into '21. Some of the more interesting areas are, A, semiconductors, and so really these chips are hardware that goes into, well, a whole bunch of things. The data centers that are responsible for hosting and transmitting this call, could be your car, could be factories and the equipment in those factories. And of course, as the global economy ramps up, semiconductors-- which are about 20% of that ETF benefit.
And then digital advertising. The easy layup ones, the Googles and the Facebooks-- two dominant companies that are really very much about the economy being healthy, businesses advertising, and consumers buying. So that's another two companies that's a big portion of ETF that stand to do very well.
All right. And just if I could, just the semis, I know we've been hearing-- every headline I see, is we're seeing impacts of a shortage of semis not being available for everything right now, as well.
That's right, and that's another big demand signal that we're getting. And we're really getting it from just about every semis company. And there's so many layers to this that I think we'll have to do a whole other segment. But you've got geopolitical considerations between China, Taiwan and the US. You've got this rising demand, you've got supply chain disruptions and interruptions. And so that's another incredible story, but it is very much a recovery play for the post-pandemic world.
You mentioned some of the big names, like the Facebooks and I'll say the ones that are attached to advertising and the opportunity there. And it feels like in 2020, amongst everything else that was going on, there was a bit of a wake-up call with regulators about the dominants of the tech sector. And I know. I've spoken with you and many others about this has always been a concern as they get bigger and bigger. But it seems to have come home to roost in 2020. So what is that going to mean for 2021 in terms of what you see with those big players?
Well, it's a dangerous topic because we can get caught up in the nuances so much. But I really propose we zoom out a little bit, take a step back, and ask ourselves, look, what happened between the 2016 election, the 2020 election? What happened is that these companies cumulatively paid tens of billion dollars, billions of dollars in fines. They were in front of Congress all the time. There's new strict and stringent regulation against them in Europe.
And yet, they continue to grow sales, they continue to grow earnings, and these stocks grew by an average of 24% per year. So all in good show, it's like this was like a big circus you could observe and still get paid very well for attending the circus.
We look for it now. Yes, regulation is here. Arguably, there's more on the plate today. But the businesses are still monopolies, duopolies doing really well. We don't see any imminent threat. And these businesses, we think, have another good four years ahead of them for this cycle.
What about valuation? I mean, the one thing that-- I mean, I know we saw a steep sell-off in March. Things rebounded. But I think Tesla is now worth more than the next six biggest car companies combined. Airbnb is now worth about one third as much as the largest 25 public hotel chains. I mean, they're getting pricey.
Some things are getting pricey, and it's definitely the number one cause of concern. There's no reason to press the panic button, I would say. And the reason is, as we look across and put things into buckets, like valuation and quality of businesses, you take an ETF like TEC or the broader tech index, 90% of things out there-- and we'll point to the Amazons or the Microsofts or the Apples-- they're trading on fundamentals.
They are trading at reasonable valuations, and many of them, we think, are actually undervalued. There are these pockets where I think investors are doing a lot of concept investing. They're betting on certain end states but forgetting to assign probabilities. And usually, in a lot of these concepts, the probabilities are that these businesses will fail.
And so this is a risk, but it's still a small pocket of the market. But probably it's the number one topic you and I should revisit in a few months.
And we will. Vitali, we'll have you back and we'll talk just about that. Thanks so much.
See you soon, Kim.
[MUSIC PLAYING]
