Why Big Tech still hasn’t been fully priced-in yet even at all time highs.

1. The most common cited threat for big tech is regulatory risk. However it’s current valuation, even at all time time highs, does not justify concern. Regulatory intervention may force big tech to abandon their best option(s), but their second-best option(s) are not often significantly worse. Take for example the big EU regulation eliminating the ability for the Android OS to default to Google search, which only slowed Google's revenue growth in EMEA by 2%. Also let’s be realistic, the United States doesn’t not want to risk destroying their best companies. The US is proud of companies like Microsoft and Apple, whom have become beacons of our capital markets and whom help us compete with growing countries like China. I foresee the US government doing some political positioning and saying they're against big tech, but extreme regulations would handicap a lot of the GDP, tax revenue, and wealth that helps us compete on the global scale. The fact remains that these companies will easily pivot around any and all regulations, and they will still be able to aggregate most of the market demand, and leverage that initial demand to attract ever more incremental demand.
2. This level of aggregation has never been seen before. For most 20th century products, distribution was controlled by the manufacturer (think Ford dealerships and Apple Stores), but that changes with the internet. Suddenly, you have intermediaries like Amazon that wield a lot of their power by controlling the supply of consumers. Now producers are competing just to get on Amazon’s front page since that’s where all of the customers are. The advertising market went from thousands of then “wide-moat” TV stations, radio stations, and newspapers globally to evolving with now over half of the demand aggregated by Google, Facebook, and Amazon alone. In general terms, it’s not that different from a department store like Macy’s, but aggregation is happening on a scale that those earlier companies could never achieve. There was much more competition back then (i.e., fewer winner-takes-most outcomes), and without the internet, the largest companies in a given industry weren’t able to aggregate demand to the same extent these current aggregators are able to, and I believe the market is still in the early stages of this realization.
3. This leads me to my third point, which is how the 5% rule contributes to the systemic undervaluation of big tech and gives us retail investors and HNWIs have a significant advantage. Back in the 1940s, the SEC placed a 5% “soft cap” on the maximum position size for hedge funds which is still in effect today, 60 years later. Hedge funds are constrained by these fiduciary responsibilities built on data and realities of the pre-internet world where these internet-enabled aggregators did not yet exist. Even though Microsoft, Apple, Amazon, and Google are some of the most well-researched stocks, the market hasn't priced in this new market landscape. As demand fundamentally shifts from companies operating in the “middle of the pack” to a few truly scaled winners, portfolios underexposed to big tech will have inferior risk-reward profiles to those that aren't.
4. Yet that begs the question of concentration risk, is being overweight in Big Tech internet-era aggregators a bad thing? Well they have vastly lower competition risk compared to “aggregators” of the pre-Internet era and much less-dominant modern companies, so in my opinion no. For example, with two or more successful aggregators within the same industry (e.g., streaming services), they're not always directly competing head-on, but rather offering complementary products and/or focusing on fulfilling different demand types (e.g., Netflix and Disney+). As a result, the concentration risk is not nearly as high nowadays as history would suggest when taking a large position in a winning aggregator/platform. Calculated diversification is good… but diversification for the sake of diversification is unnecessary with Big Tech. If anything, valuation risk is much more considerable than company-specific risk. However, at this specific moment in time the valuation risk for Big Tech is currently quite low.

The market is naturally moving toward having fewer, larger and more durable quality companies, and regulation is not going to stop that. It might cause Big Tech’s earnings growth to slow somewhat, but it just won’t alter their overall business prospects as much as most investors think it will. Big Tech has very little competition and incrementally increasing demand, and the constraints imposed by the 5% rule for hedge funds give us retail investors a leg up when it comes to structuring our portfolios.