With 2020 firmly in the rear-view mirror, one aspect that has continued into 2021 is the major disconnect between the financial markets and the real world economy. With further stimulus being rumoured in the US, it adds to the already inflated market where we’ve seen a record number of retail investors take to the financial markets with their stimulus packages in their brokerage accounts.
Courtesy of Goldman Sachs, an index of US-listed, non-profitable tech companies has been created.
(Source: FT)
However, there are several ways this chart can be interpreted.
The first being that since the US has reduced their base interest rate to record lows and given out over $6tn in stimulus packages, it led to an inflated market as many try to beat the market in an attempt to grow their stimulus checks, grow their savings faster or to stay ahead of the future inflation rate risks. This has caused many to be “risk on” as its essentially free money from the government, resulting in many people gambling on non-profitable tech companies that they think will do well despite not knowing anything about them. You can blame Reddit and their now infamous “R/WallStreetBets” thread for that.
An example of this may be Palantir, a US data analytics firm who despite making losses of $853.9mn in Q3 have recently rallied to a new all-time high of $44.53 on 27th January. This is more than likely driven by Cathy Wood investing on behalf of her flagship ARKK fund, causing a whole host of retail investors to join in on the potential profits. Regardless, Palantir is overvalued due to this frenzy, and they are not alone, no doubt.
Another way to view it is that due to Covid-19 and the global economic crash it caused, it ultimately led to very favourable market conditions, especially for those who want an IPO. With the base interest rate being set at 0.25% by the FED, it allowed many to restructure their current debt thus becoming leaner and more cost-efficient; it also meant many could acquire cash for their balance sheet at a low cost, fuelling future operations. Pair this with an insatiable hunger for risk from the wave of new retail investors and the result is companies going public way too early with an inflated share price despite not being able to turn a profit- all in the name to capitalise on the current macro environment.
One thing is clear though, this exponential growth cannot continue and is very reminiscent of the dot com crisis of the noughties, albeit without a global pandemic. Whether these companies are reinvesting their revenues into further R&D or are genuinely unprofitable remains to be seen but it’s only in time we will find out.