A phenomenal year for tech stocks so far

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SIMON BROWN: I’m chatting with Fred Razak, a chief trading strategist at CMTrading. Fred, I appreciate the time today. Talking tech stocks. It’s been a phenomenal year if we look broadly. Nasdaq is up 38% after the horrors of last year’s bear market. It really has been a tech year, and we are not even halfway through yet.

FRED RAZAK: Absolutely. It’s been a revival.

SIMON BROWN: If we draw into some of these stocks, for example Nvidia, that’s all around AI. That’s all around sort of where the future of tech is. There’s a stock that’s up 200%. Is AI something which is really worth being on the watch list? It’s going to be the future, surely?

FRED RAZAK: It’s the future and it’s already here. This is the thing. You said Nvidia, like I used to say Nvidia for some reason. Yes, it’s [pronounced] ‘In-vidia’ and I’m on your side. I say Nvidia anyway. This type of technology is here now, it’s happening. The full application of it we’re not going to see into the next five to 10 years.

That means that these companies that people are investing in, like Nvidia or like Microsoft or like Facebook – which is Meta now – are there the crux of really running this race.

It reminds me of the year 2000 with the internet boom, where everybody was trying to get hold of a company – and they didn’t even know where it was going to go. But now you have the major computer companies, the major tech stocks, that are just fighting against each other for space. And in the arena what they offer the public is going to be kind of interesting.

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SIMON BROWN: I remember back in 2000, the dotcom [bubble]. I’m old enough to have been around in those days. You make a point – Google, for example. In the nineties Google wasn’t even a search engine that anyone knew about yet, and now it’s the dominant one.

I suppose in a sense we’re trying to spot those big winners and stocks like Nvidia. Microsoft [which] has obviously got the core stake and OpenAI are probably easy spotters. What about some allied stocks around there? Or do you focus on the big ones?

FRED RAZAK: Right now, it’s a little bit hard to say which ones are going to be the next Google. Google kind of came in, let everybody do what they did, and came up with a superior product and it just went like wildfire. They took it from there and then they took acquisitions on YouTube; they saw the next thing.

I think right now these big major corporations like Microsoft are situated in a very good position. But remember, just like with everything else in life you can’t do everything all the time. So there are going to be a lot of opportunities around smaller companies that are maybe thinking of the idea just now, and it’s not going to actually hit the market for another three, four years. So we have to look at how the market’s going to respond to it.

Okay, what’s going to take off in the realm of AI? Is personal healthcare going to take off? Is it going to be [that] security is going to take off? You’re going to have to see exactly [what], because AI has lots of applications. Which ones are marketable is going to be another story.

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SIMON BROWN: Yes, we all think of ChatGPT, DALL-E and the like, but actually the scope is almost limitless.

I want to touch quickly on Meta. You mentioned Meta. Mark Zuckerberg really went all in on the metaverse. Heck, they changed the name of the company to Meta. He seems to have backpedalled on that. Is that a good move for them in the sense of saying, look, the metaverse is coming but maybe it’s not worth tens of billions of dollars every year at this point?

FRED RAZAK: Well, if they’re going to be the best at it, then potentially they’re going to be the biggest dominant player in it. Facebook as it stands right now obviously has kind of done its product lifecycle, I believe, with TikTok and Instagram coming out.

All these other alternative kind of social media sites are really taking Facebook to town, and Facebook hasn’t really done a facelift, so to speak. It looks like the same thing, almost, from 10 years ago.

So I do believe that he sees the fact that his product has kind of done its lifetime cycle and it’s time to invest in something that potentially will be the technology of tomorrow. Whether or not it actually ‘fruates’, that’s going to be determined on the market. But right now you’re right, the stock is up; it has almost tripled from what its lows were. That’s really a tremendous feat, just going from November 2022 to where we are now.

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SIMON BROWN: And maybe it’s a case of our forgetting that some of these tech stocks were almost mature – Meta one of them – and they need that new product in their arsenal. Otherwise, I don’t want to say they become boring, but they kind of lose relevance. You’ve seen it in Microsoft Azure Cloud, for example – their desire to move into gaming as they reinvent themselves under, I was going to say the new CEO, but of course he’s been there close on a decade now.

FRED RAZAK: It’s also the fact that it’s not just the lifecycle. They have to move where the money’s going to be. These companies are sitting on so much cash that they could just retire on the cash alone, but they want to add value to the market because they want to stay relevant.

Today the gaming industry you mentioned is probably two- or threefold larger than the tech industry.

The gaming industry just itself is one of the largest industries in the world right now. So it is going to be very interesting to see if these kinds of companies are going to be able to evolve themselves into those next types of products.

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SIMON BROWN: Yes. I look at some of those releases of the new AAA games, and they do better than giant movies. That gaming really has taken off.

We can end off by looking at the rest of the year. As I said up front, we’ve had a phenomenal start so far to 2023. We’re not even halfway through yet. Do we take the view that the trend is there and stay with it – don’t try and stop a steaming train because this is moving and there’s momentum here?

FRED RAZAK: There is momentum, there is momentum. It’s not to say that people are not going to take some money off the table. We are still in an inflationary environment, don’t forget. The Fed has signalled that it’s not the end of its tightening, and possibly increasing interest rates. So those are two factors kind of to take into consideration.

The technology industry is a sector, it’s not everything. We still have real estate problems right now because the interest rates are so high.

So prices of housing are going down. There are other factors; there’s high unemployment and other factors that are in the ecosystem of the economy right now that are not completely healthy.

Whether or not the technology industry is going to be able to sustain the risk of the economy like it did back at the onset of the 2020 pandemic, where we sold off, and it was the tech stocks that took us higher and completely rallied the market.

I don’t know if you remember that towards July, August. The tech stocks were the first ones that went higher. Microsoft made new highs, Google made new highs, Amazon made new highs, and it kind of reshaped the entire landscape. We hit new highs of 36 000 on the Dow. That was unprecedented. We didn’t think that we would be there.

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And so the question is: Can we repeat that now with the technology sector kind of carrying the rest of the market higher? That needs to be seen because we’re not in the same type of environment. We are in an inflationary environment. There is high unemployment relative to where we are in the industry.

So it’s going to be kind of interesting. This is definitely something that is going to expand, even at these levels. Facebook is trading at $283, or Microsoft trading somewhere in the $300 range, and Nvidia trading in the $438 range. Are these overpriced? Maybe not, because if it’s going to be a trillion, billion business in the next five to 10 years, then you know these denominations are relatively small compared to the upside potential.

SIMON BROWN: I take your point on that. If we look forward five years [or] a decade, certainly these prices maybe aren’t quite so crazy,

We’ll leave it there. Fred Razak. chief trading strategist at CMTrading, I appreciate the time today.