27four Investment Managers
7th September 2020
Chatter of another dot.com-like bubble seem far fetched
The past few weeks were crowded by news, debates and discussions around the monstrous rally (as well as sporadic selloffs) of mega-cap tech stocks like Apple, Amazon, Microsoft, Facebook (commonly known as FAANGMs), Tesla and risk assets in general. As illustrated on the graph below, the FAANGMs plus Tesla rallied sharply since markets hit the Covid-19 crash floor on 23 March. Tesla for instance has more than quadrupled its market value over that period and is way above its level prior to the Covid-19 crash. This is despite being sold off heavily this week when it was denied entry into the highly coveted S&P 500. Apple has more than doubled. Growth in market capitalisation of these companies pulled up most major indices.
Meanwhile, earnings of these companies have not grown inline with their share prices which has consequently stretched their valuations (shown on the graph) triggering talks of an imminent market correction with some alarmists likening current market events to the dot.com bubble and bust. The dot.com bubble was a stock market bubble which built up in the 90s and burst in the year 2000. The crash saw the tech-heavy Nasdaq losing three quarters of its value between February 2000 and February 2002. By late 2000, more than $5 trillion in wealth had been wiped out.
While we concur with the view that the tech sector is overbought and a correction of sorts is imminent, we do not think we are at the cusp of a dot.com-like bubble. We say this for two simple reasons.
- Unlike in the 2000s where investors speculatively piledinto anything with the prefix e- or the suffix com for thesake of having an exposure to the internet sector, thecurrent gravitation towards tech companies is driven byinvestors looking for quality companies to cushion themselves against Covid-19 headwinds. Apart from Teslawhich is at an early stage of its cycle, balance sheets ofmajor tech companies driving the rally are strong andaflush with cash. They have low earnings variability andsolid profit margins. Most of them are conglomerates withunrivalled scale and market share advantages. It is difficult to see any of these companies collapsing in adot.com-like fashion. In fact, most of the leading tech companies rank highly in the MSCI World Quality Index whichtalks to the quality of their businesses.
- The other factor which militates against the bust theoryis the diversity of today’s tech industry. Unlike in the 90swhere the hype was around internet, this time the rally isdriven by diversified set of companies with significantlydifferent long-term drivers.
Commentary from the 27four financial analytics team