by Zain Jaffer
Recent headlines in late August and early September 2023 were about the price of Nvidia stock, the woes of Apple related to China and US market relative to its iPhone 15 launch, and the much awaited Initial Public Offering (IPO) of ARM, the chip design firm that does much of the chip designs for the Android and iPhone operating systems.
Let’s face it. Silicon Valley and the tech startups it has generated like Intel, Apple, Facebook, Google, Uber, Airbnb, and the like have captured the imagination of the world and our wallets for decades. There are also other places like Boston, Austin Texas, Seattle, and those abroad that have also created these tech startups.
We enjoy working from home because of Zoom and Microsoft Teams. If we want to understand something we can watch a Youtube video or ask Chat GPT or Google about it. We stay in touch with loved ones around the world through Facebook, and make our opinions heard on X (formerly Twitter). Clearly tech has done a lot to change our lives. It has also created big industries in many fields like information technology, services, retail, biotechnology, and the like.
Unfortunately not everyone works in tech. There are many people whose lives are positively affected by tech, but sometimes their problems are bigger than what tech can solve or give them.
Our stock markets are overly relying on tech. In the NASDAQ and S&P, the high flyers are the tech companies. Unfortunately most companies are actually not healthy and are barely surviving. These companies cannot raise funds from the markets because maybe they are not too sexy. They simply produce products and services that many of us need, but from a excitement standpoint, maybe they just don’t have it.
An energy utility company might be producing the electricity we need, and have the cash flow from customers who pay their monthly bills. A tech startup that lists might not have any significant revenue yet, just the excitement from their upcoming product, and yet the public values the tech company more.
Stock markets are there to allow companies to raise capital not from debt but from equity. As a buyer, you risk your money to buy stock without any guarantee that you’ll get paid back, but you do so because if the company does make it, it will pay you back with a higher stock price or with dividends. But again the public, because of the fantastic returns and track record of tech, has an overreliance on tech that disadvantages the other sectors.
Unfortunately our economy cannot just run on tech alone. We are now in a regime of high interest rates where debt financing is extremely expensive. Many non tech companies and industries can survive and thrive if the buyers give other sectors a chance too. Some of them may be boring but you may be surprised that they really have cash flow coming to them if only they can get the capital they need.
So before you buy that stock with a Price to Earnings (P/E) ratio that is extremely high, do remember that what worked well in the past may no longer work well in a regime of high interest rates. Investing in hospital chains, electric utilities, and other traditional industries may not be sexy and exciting, but you may be surprised that they do deliver the cash when you need it.
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