The tech bubble burst 19 years ago. But it’s not something we would forget easily. More pertinently, are we right in drawing an analogy of the persistent fondness for tech stocks to the 1990s frenzy?
Three have been valued at $1 trillion (Microsoft, Apple, Amazon).
Five FAANG stocks drive the entire stock market (Facebook, Apple, Amazon, Netflix, Google).
Investors have become obsessed with “unicorns” - privately held technology firms that are valued at more than $1 billion.
Morningstar calculates that technology stocks have gained 127% cumulatively over the past 5 years, making them easily the best-performing U.S. sector.
John Rekenthaler, Morningstar’s vice president of research, elucidates on why he believes that they will not suffer anything like a repeat of their 2000-02 woes.
1) Today’s technology investments are one notch less speculative.
Whereas the New Era’s fringe consisted of businesses that lacked clients, most current technology firms have significant revenues when they go public. They may yet go bankrupt if they cannot convert the top line into bottom-line success, but at least they stand a puncher’s chance.
2) They are profitable.
The trend is similar among the industry leaders. The current portfolio of Invesco QQQ Trust, which indexes the Nasdaq 100, is dominated by companies that are massively profitable. Perhaps those earnings cost too much, but there is no question about their ability to make billions of dollars per year. In late 1999, on the other hand, several Nasdaq 100 holdings were either money losers or eking out modest profits. Yahoo, for example, was among the 30 largest U.S. companies (of any stripe), with but $50 million in earnings.
3) No frenzy yet.
While Silicon Valley is currently fashionable, its companies have not caught the public imagination as thoroughly as they did in the '90s. Brokerage firms are not blanketing the airwaves with day-trading advertisements; there are no best-sellers advocating that the trees can grow to the sky; and Morningstar analysts are not receiving death threats for assigning low star ratings to technology stocks.
4) Sentiment is an unreliable indicator.
Its signals do not warrant much credence unless they are acute. Twenty years ago, the fervor for technology was extreme--the loudest for any segment of the U.S. stock market in at least 30 years (probably longer). That sign could not be ignored. Today’s enthusiasm is worrisome for those of a contrarian bent, but it is not so overwhelming as to be flashing red.
5) Price/earnings ratios offer more tangible evidence.
A January 1999 article from thestreet.com carried this gem: “Our calculated price-to-earnings ratio for the Nasdaq Composite is 90.2. That is not a typo.” That technology stocks headed almost straight up until March 2000 demonstrates that, as with sentiment, price/earnings ratios are imprecise barometers. That the Nasdaq 100 then plunged 78% over the following 30 months shows that, while imprecise, they can be highly useful! Morningstar currently calculates the Nasdaq 100’s PE ratio to be 23--slightly below its 15-year average and (of course) far beneath its New Era levels.
Today’s technology leaders are more mature than those of 20 years ago, thereby warranting lower price multiples, but nevertheless, the difference in PE ratios between then and now is striking.
This post initially appeared on Morningstar.com
