[책]Why Technology is not a bubble by GS

Goldmansachs 의 Tech 보고서. 올해 가장 많이 읽힌 4개의 보고서 가운데 하나로, 6월 발간. Tech sector 롱뷰를 길게 외쳤으나, 최근 6개월간의 결과는 알다시피 좋지 않다.

주장에 동의하는 것도 아니고 결과가 맞았던 것도 아니지만, 의미 있는 fact 조사들이 많아서 내용 요약 공유.

1.Amazon, Apple and Microsoft have a combined market capitalisation greater than the annual GDP of Africa (54 countries).

2.The biggest individual stocks historically have reached a higher share of the S&P 500 than today. Apple is 4%, compared with 7% for IBM in 1978, 6% for AT&T in 1981 and 5% for Exxon in 2008.

3. Sectors and stocks can dominate equity markets for long periods. Transport remained the largest sector in the S&P for over 60 years (1852 and 1914).While selected ‘value’ may recover, technology is likely to continue to dominate.

4. The S&P for example has 25% in Technology, China is now over 40%. Europe, on the other end of the extreme, has just 5% of its market capitalisation in theTechnology sector (almost 50% of which is comprised of just two companies, SAP and ASML).

5. The concentration of the largest stocks globally is also very striking.The biggest 20 technology stocks globally have a combined market cap of over $6trn, but the top 5 companies comprise 60% of this total. These super – large companies are concentrated in two geographies:

1) US – FAAMG: Facebook, Amazon, Apple, Microsoft, and Alphabet’s Google. 2) Asia – STTAB: Samsung, Tencent, Taiwan Semiconductor, Alibaba, Baidu.

6. China’s production of higher-tech manufacturers has matched the US’s ($1trn) and now outspends the US in capex in the sector by 80% ($450bn compared with $250bn).This is a remarkable growth given that in 2005 China produced and invested one third of what the US did in high tech

7. In the late 1990s the technology sector was driven by significant valuation expansion as investors were seduced into believing that ‘technology’ or even telecom and media companies could generate huge potential returns. In the current cycle the success of the technology sector largely reflected stronger fundamental revenue growth and margins.

8. Margin expansion and stronger earnings have explained most of the returns in the technology sector in recent years. Indeed, as Exhibit 8 shows, the bulk of the returns in the technology sector have been driven by earnings (86% of the total since 2008 in the global technology sector).The market ex technology has actually seen a larger proportion of its returns driven by valuation expansion than has been the case in the technology sector.

9. Furthermore, while earnings revisions for the entire stock market experienced years of significant downgrades since the start of the financial crisis (Exhibit 9), technology sector revisions were far more stable (Exhibit 10). In an uncertainWorld with significant downside economic tail risks, technology has been seen to be correctly relatively stable

10. A comparison with previous Bubbles – The Nifty Fifty (1960s/70s) and technology late 1990s Two previous periods when a group of stocks dominated the equity markets were the in 1960s to early 1970s in the so-called ‘Nifty Fifty’ era and the rise in technology in the late 1990s. The ‘Nifty Fifty’ period saw the dominance of a group of 50 companies that, unlike the 1990s, were not focused on a particular sector but rather a concept. There was significant optimism that US economic dominance would allow a new breed of US corporations to become truly global market leaders – multinationals. Many of the companies that were favoured did enjoy very high returns (rather different from the tech bubble of the late 1990s when the market was dominated by new companies with no returns) and a belief that these could be maintained into the long term future. For that reason they were often referred to as ‘one-decision’ stocks. You bought and held them irrespective of the price. There was a popular shift away from value investing towards growth investing. As a result the valuations increased hugely. By 1972 when the S&P 500 had a P/E of 19, the average across the Nifty Fifty was over twice this level. Polaroid traded at a P/E of over 90 and Walt Disney and McDonald’s over 80x forward expected earnings. Interesting, despite these very lofty valuations, Professor Jeremy Siegel argued (see Valuing Growth Stocks, Revisiting the Nifty Fifty, American Association of Individual Investors, October 1998) that most of the stocks did actually grow into their valuations and achieved very strong returns.

A similar narrative later drove the focus on the ‘New economy’ of the late 1990s. Then, as in the 1960s, Value (or ‘old economy’ ) stocks became very unloved.

The current rise in technology companies that followed the financial crisis is rather different from the frenzy that drove the bubble in the late 1990s. In the years before the crisis banks dominated the sector weights in many equity markets (benefiting from a cocktail of strong growth, high leverage and product innovation). With the demise of the banks leadership in markets, technology has quickly become the major leader of market returns and a dominant sector once again. Since 2008 technology in the global stock market has increased from 7% to 12% – at the same time it has nearly doubled in the US from 13% to 21% in the S&P. In the late 1990s the technology share of global market capitalisation went from just 10% of the S&P in 1996 to a peak of 33% in 2000.

Valuations of today’s tech stocks are much lower than in bubble periods of the past Most importantly, however, the valuation of the companies in the earlier periods was much higher than for those of most technology companies today. As Exhibit 21 shows the largest tech stocks in the tech bubble traded at an average of over 50x PE (although many stocks were far more expensive than that). The largest Nifty Fifty stocks traded at an average 35x.Today, the largest tech stocks trade at a little above 20x expected earnings despite the very low level of interest rates today (particularly relative to the early 1970s).

11. We can split the long sweep of history in the US equity market into 4 main periods of leadership.

1) 1800 – 1850s Financials Over this period banks were the biggest sector. Starting with almost 100% of the equity market, the stock market developed and broadened out. By the 1850s, the sectors weight had more than halved.

2) 1850s – 1910sTransport As banks started to finance the exploding railroad system in the US (and elsewhere for that matter), transport stock took over as the largest in the index. In their boom years they reached close to 70% of the index in the US before fading to around one third of the market capitalisation by WW1.

3) 1920s – 1970s Energy With the huge growth of industry, powered by oil rather than steam and coal, energy stocks took over as the biggest sector. This continued as the main sector group until the 1990s, although interspersed with brief periods of leadership from the emerging technology sector (in the first wave it was lead by main frames and subsequently by software).


1. 1955-1973: General Motors – the Golden Age of Capitalism, General Motors’ earnings were more than 10% of S&P 500

2. 1974-1988: IBM – the age of mainframes (peaked at 7.6% of market cap)

3. 1989-1992: Exxon – Exxon was a spin-off from Standard oil which was dominant for such a long period nearly a century earlier – (peaked at 2.7% of market cap)

4. 1993-1997: GE – (peaked at 3.5% of market cap)

5. 1998-2000: Microsoft – the age of software (peaked at 4.9% of market cap)

6. 2000-2005: GE (again) – (peaked 3.5% of market cap)

7. 2006-2011: Exxon (again) – (peaked at 5.2% of market cap) – although Bank of America and Citigroup were briefly the biggest stocks at points between 2006 and 2007 prior to the financial crisis

8. 2012 to today: Apple (peaked at 5.0% of market cap

13. (좀 길지만, facts 와 잘 정리된 tech 발전사)

The Assent of technology has historical parallels

Given the success and dominance of the tech sector today’s technology revolution seems unprecedented… After all according to many estimates (see SINTEF, Science Daily, 22 May 2013) 90% of the World’s data has been generated over the past two years. Around half the World’s population now has access to the Internet – and this has grown from virtually nothing in less than 30 years. The explosion of data and cloud storage is transforming not just the companies that facilitate the technology but also those that use it to disrupt traditional businesses. But there are other interesting examples of the astonishing impact of technology ‘waves’ that can help to contextualise the impact of the digital revolution that we are currently witnessing.

…the printing press triggered the first great data revolution One of the most important waves of technology that revolutionised the way that the World’s economies and people worked and communicated was the invention of the printing press in 1454. This technology triggered an explosion of data; it arguably laid the seeds for the Age of Enlightenment with its myriad of other ‘life hanging technologies’ (or killer applications as they are often referred to in a contemporary setting). Before the printing press information was hand written on manuscripts and the production, as well as access to it, were tightly controlled by the Church. With the onset of the printing press the volume of data that became available grew exponentially and, with it, the cost of information collapsed (sounds familiar). According to research by Buringh and Van Zanden (2009) the number of books published exploded from none to around 3 million per year by 1550 in Europe – more than the total number of manuscripts (pre printed books) produced in the entire fourteenth century. There were 600 million books published by 1800. Like all technologies the price of books collapsed as the production costs fell. Massive social and societal changes followed

We don’t know of course how big and powerful the printing companies became within the market but what we do know is that the printing press technology acted as a springboard to generate many other important technologies which, in turn, spurred many new technologies and businesses while at the same time disrupted traditional industries forcing many to change and evolve.

…the railway revolution built connected infrastructure In the Industrial Revolution technology was again at the heart of growth. Many of these technologies developed from, and relied upon, each other and, importantly the network effect that new infrastructure provided (railway lines like the internet infrastructure today). Part of this was spurred by the extraordinary success and growth of railways. In 1830 England had 98 miles of railway track; by 1840 this had grown to around 1,500 and then by 1849 there was around 6,000 miles linking all of the major cities (George Hudson and the 1840s Railway Mania, Yale School of Management, April 2012). Cheap money and an existing new (revolutionary) technology attracted a surge in investment. In the UK share prices of new railway companies grew exponentially and finally reached a peak in 1845 before crashing spectacularly. By 1850 railway shares were worth less than half their peak values and dividend rates had collapsed from around 7% to less than two percent.

This first wave of excitement in a ground breaking new technology often leads to an indiscriminate rise in valuations of new entrants because it is, at first, so difficult to anticipate who the relative winners and losers will be.This same process was evident in the late 1990s when new IPOs of companies in the technology sector exploded and share prices rose dramatically across the board.

At that time of the technology boom of the 1990s the belief that technology would boost data usage resulted in a surge in value across Telecom and Media companies as well as new Technology companies. As it turned out the ultimate winners in the emerging technology spaces were often not the ones that people expected, or even existed, in the first wave. Furthermore, many Telecom and Media companies have been disrupted by the very technological innovations which, 20 years ago, were expected to be so transformative. But the optimism at the time (fuelled by strong growth as a result of globalisation and low interest rates) led to significant price rises in new companies in the technology space across the board.

But despite the over speculation initially in the stock market the development of the rail infrastructure, as with the printing press before it, paved the way for a surge in other complimentary technologies that would not be obvious at the time. For example the laying of train tracks helped the growth of telegraph infrastructure in the 1840s.Within 10 years (from nothing) sending telegrams had become part of everyday life (a bit like the Internet between the 1990s and 2000s). By the mid 1860s London was connected to New York and ten years later messages could be sent between London and Bombay within minutes. Telegram and telegraph companies became very powerful; AT&T was born (1885).