Tech Stocks Roar Again in Faint Echo of 2000
wsj.com
wsj.com
2000 was an IPO bubble of companies that had no revenue, no prospect of revenue and no business plan. Analysts went out of their way to justify valuations by inventing new metrics like revenue-to-price multipliers.
What's different today is that the likes of Apple, Google, Microsoft, Facebook and Amazon are money-making machines on a scale probably not matched since at least the era of Standard Oil, the 19th century railroad tycoons and other industrialists like Carnegie.
I mean, Apple is trading at a P/E of less than 19 and it has a market cap of $842B. That is mind-boggling but not at all outrageous.
In 2000 the tech IPO bubble burst. In 2007 the subprime disaster came crashing down. It is absolutely certain there will be another downturn in the future but at this point I have no idea what the next trigger will be.
My best guess is something to do with China. This could take many forms. Some think that the Chinese economy is a house of cards. There has clearly been a flight of capital from China. Who knows where this ends? Also, Chinese money in particular has been flooding into Western real estate markets. This too may come to a head.
Or it could be something to do with North Korea or even Iran.
Or populists movements may drive Western governments to crack down on what they see as excessive power by the large tech companies, particularly in the EU.
Or a constitutional crisis instigated by our current lunatic-in-chief.
Whatever the case I really don't see any significant parallels to 2000.
[1]: http://www.npr.org/2017/07/11/536642560/is-the-justice-depar...
That's half myth. Most of the Nasdaq's value inflation was from companies with substantial revenue, not a thousand DrKoop.com or Pets.com companies.
Just the overvaluation by Microsoft, Cisco, Oracle, Sun, Nortel, Lucent, Intel, AOL, Yahoo ($1.5 to $2 trillion in overvaluation) - was more than what all the dotcom IPO companies were worth combined.
Most of the largest tech market cap companies of 2000 had real revenue.
Microsoft was sporting a ~50-65 PE ratio in 1999/2000.
AOL was commonly trading for 150 to 200 times earnings, with $8 billion in annualized revenue and over a billion in annualized profit, growing at 100% year over year circa mid 2000.
Cisco was solidly profitable, had $16-$20 billion in annualized revenue and was growing extremely fast. It produced the single largest market cap in history up to that point.
Oracle was commonly trading at 100 times earnings.
Just the Cisco overvaluation alone, at $450 billion give or take, was worth more than most of the zero revenue style dotcom companies combined (companies like Geocities, TheGlobe, etc).
There is once again trillions of dollars in overvaluation among today's largest tech companies. You can easily see that when you look at how they've inflated based on the market moving rather than earnings the last three or four years. For example, Microsoft's valuation tripled over five years on the back of between zero and very little earnings growth.
Appraise Amazon's valuation based on income. Good luck.
Netflix? 150-200 PE ratio has been typical.
Activision is worth $50 billion, trading at 45-50 times earnings, with typical 7%-10% style income growth.
Cisco's valuation has nearly doubled in five years, despite very little income or business growth.
Alibaba is trading for 50-60 times earnings.
Salesforce.com is trading for... oh geez, 400 times last fiscal year's earnings, and a lot more than that based on the last four quarters.
Oracle's stock is up by about 1/3 in the last year, while its business can't get beyond where it was in 2015.
VMWare has a ~43 PE ratio, and is lucky if they can generate 10% growth at this point.
Intel has doubled in five years, with minimum income growth.
nVidia is trading for 60 times earnings. Sales might grow 15%-20% in the coming year, which caps what their earnings growth is likely to do as well.
Tesla's valuation? Ha.
Twitter & Snapchat, ~$35 billion in combined market value, neither have ever earned a profit.
Workday has never earned a profit. $22 billion valuation. In fact their losses just keep growing by the year, over 25% of revenue equivalent for their last fiscal year at $400 million in negative net income. Revenue nearly doubled, losses nearly doubled, versus 2015. This is a company that loses between 1/2 and 2/3 of its market cap in the next downturn as they're forced to slash the bleed out of desperation and the juiced growth implodes with it.
AMD, the poster child for showing up during market bubbles, has an $11 billion market cap and hasn't earned a profit in ... who remembers when. Their stock went up 6-7 fold on hype, while they can't even get sales back to 2014 levels.
Splunk, $9 billion market cap. This is a company that bleeds red ink by the barrel ($800+ million in losses the last three years, on $2 billion in sales). Oh but they're growing fast so it's ok? It won't be ok when the music stops and they have to cap the red ink, then the growth that's artificially juiced by that goes with it.
Broadcom, 50 times forward earnings, lucky if their growth hits 15% in the next year.
Texas Instruments. Zero growth for years. The stock is up roughly 40% in the last year. Pure multiple expansion.
Priceline.com, 40-45 PE ratio, lucky if they can hit 10% style growth in a given year since 2013. Stock is up 50% since 2014, while earnings are still below that level.
This list only keeps going.
Is it as bad as 2000? No, it's merely extremely bad today, not yet dotcom bubble days bad.
> Microsoft was sporting a ~50-65 PE ratio in 1999/2000.
Today's PEs:
MSFT: 28.35
GOOG: 34.74
AAPL: 18.55
FB: 38.64
CSCO: 18.08
ORCL: 22.18
T: 16.33
VZ: 12.54
CMCSA: 17.56
INTC: 15.56
NVDA: 57.80
TSLA: --
AMZN: 277.89
NFLX: 201.87
As for the outliers, they're all pretty much examples of large bets on the future of the various companies:
- Nvidia seems to be well placed for GPU driven ML
- Tesla is a bet on battery tech and self-driving cars
- Netflix is a bet on Netflix dominated global on-demand entertainment and distribution (they're now in all but 4 countries)
- Amazon is of course a bet on owning the online retail sector
Like any bet some will pay off and some won't.
> This list only keeps going.
See now that's a bit of a stretch.
That's the part where the market has kicked into bubble valuation territory, when you're primarily seeing multiple expansion driving 40% or 100% type gains.
Microsoft hasn't been able to grow earnings for years. Why do they have a 30 style PE ratio? Why did their stock triple on zero earnings growth? Comparing their growth today versus the multiple, against 2000's valuation, today's value proposition is drastically worse. Or spread it out, compare 1995-2000 MSFT growth, with the multiple they had at the end of that five years, versus 2012-2017 growth and the multiple they have now.
As for Microsoft specifically, it's run largely coincided with Satya Nadella succeeding the largely lackluster Baller. Coincidence?
And Azure is doing pretty well too - it's a 3 horse race with AWS and Google, and there does not necessarily have to be a single long term winner.
people will continue to pay higher prices with no regard to whether its "expensive" if they feel confident in the economy. And ultimately if they feel a greater fool will buy them in the future.
Why are you sure if that? The opposite is true. At some point stockholders will get afraid and pull back. The question is how much, and who gets hurt the most.
I think the point of the parent comment isn’t that a high PE ratio is inherently bad, but that these stocks are more highly valued relative to revenue than stocks usually are.
And they are valued as money making machines.
Amazon's profit margin is now just 0.59%. When economy hits downturn, it will hit Amazons profits and valuation.
It took eight years for Amazon to return back to its 2000 valuations after crash.
Market bubbles are not caused by success or failure of the companies themselves. They are caused by overpricing the the companies. No matter how good the company is, it can be always overvalueud.
But, when you have stocks like SNAP with no revenue getting away with selling non-voting raises 3.5 billion at 20 billion market cap, there is something wrong. It's not the strongest names which need to drag down the market, it's the weakest ones.
Then you have Softbank raising tons of money to invest in tech: https://www.recode.net/2017/10/19/16506218/softbank-new-inve...
Though I agree this time the bubble might not be the tech IPO rather the cheap capital around the world. That doesn't mean tech stocks will be insulated. Tech stocks might see a large hit, something comparable to the 2000 bust days.
Snap has A, B and C. They offered A which has zero voting rights.
Facebook tried to get another structure in place this year but dropped it.
So, not literally the same argument.
Additionally, the preferred holdings in Facebook's case make the difference between the 1 vote class A and a hypothetical zero vote class somewhat moot (at the moment anyway).
Now cryptocurrencies do seem to fit the "this time it's different" model.
>> What's different today is that the likes of Apple, Google, Microsoft, Facebook and Amazon are money-making machines on a scale probably not matched since at least the era of Standard Oil, the 19th century railroad tycoons and other industrialists like Carnegie.
During Standard Oil times there were country-barrier, but nowadays tech monopolies can almost make money tax free from those foreign countries they may not even have an office in.
My guess is AAPL, AMZN, INTC, GOOG, MSFT should all be pretty safe. Can't be said for Snap, FB, NFLX, TSLA, NVDA. I would love to see TSLA succeed though but it has lots of debts.
The good news is that if you've been in the market for a while, you're way up anyways. The 10-20% correction will come giving you an opportunity to buy low again.
And then in a decade we'll repeat everything again!
I'm fully in the market with zero intention of trying to time anything.
It will go down and back up. That much is certain. I'm ready to ride it out!
But if you arent predicting when, your prediction isnt very credible.
It is the exact opposite: if you are actually predicting "when", then your prediction isn't very credible. Perhaps you meant useful instead?
Anyways, all we can do is watch external forces. When will the Chinese asset bubble pop? When will the fed raise interest rates? If those things happen, will that take other markets down with it?
Honestly, I wouldn't consider a 20% correction big, if you're up 33% in the last 12 months.
The current boom since 2011 could easily extend for another decade, just like the boom from 1980-1990. If you felt there was going to be a correction then just because "its due" you would have missed the huge boom from 1990-1999.
The only reason why I think we're due for a correction is that PE ratios and the like seem out of wack. But you are right, this could keep going for a long time and maybe the economy would grow enough to start to justify the stock prices.