Tech Bubble: First Robinhood and now SoftBank

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Last week, the Financial Times (FT) reported that SoftBank Group Corp. may be behind the recent roaring rally in large-cap U.S. technology stocks. According to the FT, in addition to buying over $4 billion in individual big tech stocks (Amazon, Apple, Tesla, Microsoft, Facebook, Alphabet), SoftBank bought options tied to around $50 billion worth of these individual stocks. But before the FT dubbed SoftBank the “Nasdaq Whale” and blamed it for the rally, many argued that the frenzy was squarely on the shoulders of “bored” unprofessional investors on platforms such as Robinhood who have taken to option trading as a new hobby while locked in. 

Could it be possible that options-buying tied to individual stocks could move markets in this way and trigger this massive rally?
  • In "Bad signs for the epic market rally", I mentioned that the market is indeed very top heavy; with 1% of the stocks in the S&P 500 - Alphabet, Amazon, Apple, Facebook and Microsoft - accounting for more than a fifth of the S&P 500’s market value. I also mentioned that while those tech giants have gained around 40 percent so far this year, the 495 other stocks in the index have collectively lost a few percentage points. This strengthens the case that SoftBank gobbling options on big technology stocks could have turbo-charged the rally in their stock prices and pushed the market into a tech bubble that started to seep last Thursday. After all, the surge in option purchases occurred during a period where Apple became a $2 trillion company; Amazon added more to its market value in a month than it did in all of last year; and Tesla's share price soared more than 26% in under the week leading to September 1st and over 1000% over the past year.
  • The opposing argument goes like this. It’s unheard of or at least unusual for options-buying tied to individual stocks to be so powerful that it could move markets in this way. The driving force for the overall market rally and "crazy" valuations in tech stocks is the easy money from the Federal Reserve. Since the lock-downs started, the Fed has been very accommodating. It pushed interest rates to zero and promised to keep them at these record lows for as long as needed. This left investors with no choice but to dump bonds and invest in stocks. Not any stocks, tech stocks more specifically the giants. This is because believe it or not, the giant tech companies are “safer” than the rest of the market. They have all benefited in some way from societal shifts brought on by the pandemic — a surge in demand for everything from online shopping and streaming-video, to work-from-home software solutions. Market observers counter that while the Fed has certainly contributed, this still does not justify the massive surge in tech prices over the past month.
Even if we assume that the “Nasdaq Whale” single-handedly caused the tech companies' valuations to balloon, does that mean that we are in a tech bubble reminiscent of the dot-com bubble?

A bet on big tech is certainly a risky one especially when options are involved. This is because banks on the other side of these option trades are forced to buy these stocks to hedge themselves. This increases the demand for these stocks and in a classic "Amazonian flywheel" fuels the frenzy in the prices of these stocks. However, I believe the bubble is not in the stock prices and hence the valuations of these tech giants. It is in their profits, the light years of innovation lead that they have secured and the amount of monopolistic market powers that they have amassed.

The new tech bubble (if there is one) bears no resemblance to the dot-com bubble and is a lot harder to burst because it's a monopoly bubble. Yes, there might be a pullback in the prices of tech stocks in the next few weeks because people will panic but the bubble will not burst. The tech giants have huge competitive advantages and have moats that are near impossible to breach. They sit on exclusive reams of data, have massive overreach, and are lightyears ahead of the rest. The only threat to the new tech bubble is regulation. This requires reforming antiquated laws that were written long before big data. This is not going to happen anytime soon.

Disclaimer: This post is merely my own assessment and is not an investment recommendation. For professional advice, seek input from a licensed investment advisor.

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