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Why Are Technology Stocks So Expensive?

While some investors remain wary of investing in technology, others have shifted their focus. This new wave of investors is driven by the perception that tech stocks have greater predictability than other types of stocks. In fact, if you have read the company’s earnings announcements, you’ll know that many of these companies topped expectations. This phenomenon has created a new class of investor – the activist investor.

The recent surge in the price of technology stocks has a number of reasons. Some investors think the prices are too high, while others say they have a better chance of beating the market. For instance, the Nasdaq Composite Index surged 20.5% in 2017 and the MSCI World Technology index jumped twenty-five percent in 2018. The rise in tech stocks has been accompanied by a rise in the market’s overall valuation.

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The reason why technology stocks are so expensive is that they tend to be cyclical. The semiconductor industry follows a boom-bust cycle of capacity-building. This means that companies have to produce superior products to justify their high valuations. This makes them very expensive, but investors are willing to pay them for the promise of future growth. If they’re not able to do so, they may end up being more expensive than other tech stocks.

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