Should Investors Embrace Tech Valuations Instead of Criticizing Them?

Tech stocks recently reached a record high after rebounding from their March low, according to a recent Bloomberg article that adds, “The stock market is not the economy, but it does feels strange for stocks to be soaring in the middle of a deep recession.”

What is the explanation? The article says it comes down to “timescale” —stock prices represent expected future earnings, and the future outlook for tech is considered “bright.” Using Tesla as an example, it explains that investors are buying the stock because they believe in the company’s “vision of a technologically advanced electric car and other products, while grouchy short-sellers write long, critical blog posts about the company’s weak balance sheet and high debt.” Even though the company’s balance sheet doesn’t seem to justify the share price, it notes that investor confidence (through share price) provides the cash needed for the company to fund its innovations.

According to the article, “experienced venture capitalists are happy to take the risk on hypothetical products for early stage startups, but the stock market hasn’t figured out how to ‘price in’ products that are yet to be created by established public companies.” It argues that if investors could accurately value a company’s intangible assets—such as management and organization structure—it would be easier to assign value not only to past products but to future products as well.

“With an economy in trouble,” the article concludes, “the path back to prosperity depends on tech companies rapidly scaling up, generating revenue and creating jobs. Finer-tuned pricing of intangible assets could speed up the recovery process, allowing growing tech companies to raise money for new product lines, rather than just to scale up old ones.”