Just like Big Tech, the market is also changing.

This has been the dominant theme for years, and it is the story of the recent sale and the mini-rebound that followed. After the brief period just before Labor Day weekend, when all ten of the Nasdaq’s most valuable members hit all-time highs, the group fell 7.2% at the September 15 close, losing 1 , $ 6 trillion in market cap from their peak. While the vast majority of stocks – including financial firms and battered airlines – proved resilient during this time, their numbers and strength were not nearly enough to offset the resilience of the fall of the titans of technology. Big tech wields the power.

Understandably, Big Tech’s downsizing has intensified the debate over whether its executives are vastly overpriced and late for a steep slide, or simply suffer from a temporary trip. Indeed, the group has rebounded from the initial drop in early September, showing that Apples and Teslas could be on the march again. Given that its brand names pretty much define the direction of the market, let’s take a look at what Big Tech’s past trajectory tells us about where the group is heading.

Five years ago, Big Tech, if not cheap, had a modest price

For this analysis, we’ll take a look at the top ten technology companies on the Nasdaq 100. These are actually 11 stocks, since the Nasdaq counts Alphabet A and B shares separately. We will treat the whole group as a single company that I will call “StarTech” and see how its price, profits, dividends and buyouts have changed over the past five years, and what these changes mean to cripple it. future of StarTech.

To best compare StarTech today with its previous releases, I’m looking at its statistics for September 30 of each year from 2015 to 2019, and those numbers as of September 15 of this year. These benchmarks are based on performance from the beginning of July to the end of June, with September quarterly results not yet available at the end of that month. FortuneScott DeCarlo, the statistical assistant at the Nasdaq, provided me with lists of the top ten technologies on the Nasdaq (our StarTech), including their market caps and earnings, on those dates. The name we chose StarTech is reminiscent of a beloved sci-fi TV series, and it’s remarkable that the best actors in StarTech and Star Trek have remained pretty much the same over the years, although for StarTech, the supporting players have changed considerably.

At the end of the third quarter of 2015, StarTech included, from top to bottom, by market capitalization, Apple, Alphabet, Microsoft, Facebook, Amazon, Gilead Sciences, Intel, Cisco, Amgen and Celgene. At the time, the future members You’re here and Nvidia came close to making the cut, ranking 35th and 78th on the Nasdaq 100, respectively. StarTech’s total market valuation at the time was almost picturesque at $ 2.688 billion. We will treat this number as its “share price”. Several of its components looked like screaming buys, with Apple at a price / earnings multiple of 13, and Microsoft at 17, Gilead at 10, and Intel at 13. All in all, StarTech amassed $ 141 billion in GAAP net profit on the last period. four quarters (July to June), and therefore housed a P / E of 19.1. Talk about retro.

In the last four quarters ended June 2015, StarTech paid out $ 27.4 billion in dividends led by Apple and Microsoft. This put its dividend yield at 1.5%. A sign of things to come, he spent nearly three times as much, an additional $ 71.8 billion, on share buybacks. StarTech was therefore returning $ 99.2 billion, or 70% of total profits, to investors. Because its P / E was a relatively modest sub-20, StarTech delivered a 3.7% return in dividends and redemptions alone ($ 99.2 billion divided by its “price” of $ 2.688 billion). This dividend yield plus buyouts provided a solid foundation for future earnings, a foundation that has since collapsed. On top of that 3.7%, investors might expect more juice from earnings gains, and perhaps a higher P / E, since its benchmark of 19 seemed to leave a margin of expansion. As we’ll see, it was the P / E’s moonshot that put StarTech in its current box.

Over the next four years the supporting cast changed and StarTech became more expensive.

Three years later, on September 30, 2018, StarTech included the exact same companies except two: Nvidia and Netflix replaced Gilead and Celgene. By that time, its “price,” or total market cap, had jumped 123% to $ 6.0 trillion. Having two big biotech revenues supplanted by new entrants with giant P / E’s has helped make StarTech much more expensive. Although profits rose 36% to $ 194 billion, the much larger rise in its price took the P / E by two-thirds, to 31.

Surprisingly, the following year, StarTech’s momentum stopped. At the end of September 2019, less than a year ago, its valuation was somewhat lower at $ 5.948 trillion, while profits rose 18% to $ 228 billion. All of a sudden, StarTech was looking, if not as a bargain, for a price that was a little more reasonable. The reason is twofold. First, Apple provided a huge, but slowly growing profit base, and Google and Facebook provided revenue that was both growing and moving forward. Additionally, Intel, Cisco and TI, big profiteers with a relatively low P / E, were still part of the mix, contributing a lot of profits over their valuations. The break, however, was only the prelude to a price explosion that had not been seen since the 2000 bubble.

It’s just last year that StarTech went stratospheric

In just over 11 months, StarTech entered territory medieval cartographers called “Here Lie Dragons.” On September 15, its market reached $ 9.42 trillion, an increase of $ 3.47 or 58% from September 2019. In contrast, profits fell 8% to $ 209 billion. This is because Microsoft’s and Alphabet’s profits have declined, Apple’s have barely increased, and the addition of Tesla for the first time and the replacement of Intel, Cisco and TI (for example Nvidia, PayPal and Netflix) added huge market caps but minimal profits.

The result: StarTech’s P / E fell from 26 to 45. Investors are now paying 130% more for every dollar they earn than in 2015, when the multiple was only 19.

Basic math says StarTech won’t make you money from here

StarTech’s overall profits have actually performed quite well since 2015, going from $ 145 billion to $ 209 billion, or 44%, or a pace of 7.8% per year. What caps the rise and threatens to fall is the rampant price which has risen three times faster than earnings.

Today, StarTech is managed much more prudently than in 2015, as evidenced by the share of profits it distributes instead of reinvesting. This contradicts the representation of Big Tech by its fans as an incomparable growth machine. From mid-2019 to mid-2020, StarTech paid out $ 30 billion in dividends, or 14% of profits. The big money went to buyouts; StarTech spent about $ 138 billion on buybacks in those twelve months, so all in all, it returned 80% of total profits to shareholders, up from 70% in 2015. While it reinvested $ 3 out of $ 10 profit to grow the business five years ago. , that number has fallen to $ 2 by 2020.

Even though it distributes a lot more cash, StarTech offers much lower redemption and dividend juice for one simple reason: its price has more than tripled. Its dividend yield fell from 1.0% to 0.32%, while the surge in buybacks fell from 2.7% to 1.5%, halving the total return provided by the two from 3.7. % to 1.8%.

A 1.8% dividend and buyout yield is paltry next to the kind of double-digit earnings fans have collected from Big Tech, and expect in the future. By implication, believers say these vaunted names will generate huge returns on the 20% of income they keep to grow the business. It’s not encouraging that they basically admit that they have no profitable place to invest the remaining 80% of their income.

Let’s make an optimistic forecast that StarTech’s total profits will grow by 6% per year over the next half decade. This is well below 7.8% since 2015. But keep in mind that she is reinvesting a portion of her profits that is ten percentage points lower. In addition, the group will continue to be dominated by pillars who are either mature (Apple, Microsoft) or are getting there quickly (Alphabet). And achieving 6% profit growth means StarTech will need to generate a return of over 20% on the dollars it funnels into new factories, factories and acquisitions.

To get there, StarTech needs to increase profits from $ 209 billion to $ 279 billion by mid-2025. If that happens, investors would pocket a decent annual total return of 7.8%, 6% from increased profits and 1.8% from dividends and redemptions. But those numbers incorporate an overwhelmingly positive assumption: that StarTech’s P / E remains at its current very high level of 45. The sale brought that number back from 50 to its peak on September 2.

A multiple of 45 is seventy-five percent higher than the 2015 to 2019 benchmark average of 25.8. Cautious investors should therefore consider what would happen if StarTech’s P / E fell to 30, or 16% above the five-year norm. In this case, its market capitalization fall from today’s $ 9.42 trillion to $ 8.37 billion, or 11%. But investors would benefit from a reduction in outstanding shares through all buybacks, which would reduce the number by about 12%, although it is important to note that newcomers Tesla and Netflix are floating more shares for. expand their franchises. Thus, the 11% drop in valuation would leave investors with an annual capital gain of 1%. The reason: although the total market cap is 11% lower, the price per share (because there are 12% less), would still be 1% higher. Add in the dividend yield of 0.32% and the total yield would be just under 1.5%.

These are not the lavish gains that big tech supporters rely on. A return of 1.5% loses against inflation. If the P / E drops back to its mid-1920s average, these potential returns would drop to zero or turn negative.

Of course, one scenario could bail out StarTech, and maybe that’s the one fanatics are counting on. They place gigantic expectations on newcomers Tesla, Nvidia, Netflix, Adobe, and PayPal, not to mention Amazon, a gang of five that sells 114 times their earnings. Few groups in stock market history have been granted such expectations. For StarTech to be profitable, they will need to deliver not only big, but bigger than big. This is the problem. What’s great about StarTech isn’t its performance. These are the expectations.

More to read absolutely financial cover of Fortune:

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