The stock market often acts as though tech stocks were members of a close-knit family that must always travel together.
Tech stocks, as a group, drove the stock market higher in the first part of 2018, and led the entire market lower this autumn, or so it is frequently said. I’ve lumped tech stocks together this way myself in describing market action recently and as far back as the early 2000s.
Talking about tech as if it were a monolith isn’t entirely wrong. Tech stocks often do move in a pack — mainly because investors frequently treat them as a cohesive entity.
But when it comes to assessing what individual companies are really worth, treating tech stocks as a homogeneous group is a major mistake, says Aswath Damodaran, a New York University finance professor. It is a form of sloppy thinking that leads to wacky share valuations and an inefficient and vulnerable market. As he has written in his provocative blog, the differences between tech companies tend to be more important than the similarities.
Facebook, Amazon, Apple, Netflix and Google were joined together under the acronym Faang when they accounted for much of the market’s rise. But they are not remotely the same in organization, focus or business model, nor are older companies like Microsoft, IBM, Intel, HP and Cisco.
“What we call ‘tech companies’ really includes a broad range of companies that are at different stages of maturity,” Professor Damodaran said in an interview. “The aging process for tech companies — which usually start out as high-growth companies — is very rapid.
“Also, some companies