If you don’t remember the speculative frenzy behind the dot.com bubble in the late 1990s, it is hard to convey the scale of what happened.
The sheer excitement as technology stock valuations spiralled was a wonder to behold. Companies popped up out of nowhere and were suddenly valued at billions, even if they hadn’t made a cent. Share prices doubled, tripled and quadrupled in months or in some cases weeks. The technology-focused Nasdaq index quintupled from around 1,000 points in 1995 to more than 5,000 in March 2000.
The tech bubble infected people who had never even considered investing before. Taxi drivers were dishing out share tips, I remember a London cabbie telling me how his stake in fashion retail website Boo.com was going to fund his retirement.
UK fund manager Tony Dye became known as “Dr Doom” for shunning internet stocks, which he considered overvalued and was duly sacked in February 2000. The following month, the bubble burst. Dr Doom had called it right, just too early.
The crash wiped 50 per cent off global stock markets after investors lost their nerve and venture capital dried up.
The dot.com boom and bust was a shocking event, dwarfed only by the financial crisis of 2008. Now people fear it could be happening all over again. So are we heading for another dot.com bomb and should you run for cover?
Look back at 2000 and the fallout was huge. In the US, the Nasdaq technology index tumbled from a high of 5,132 in March 2000 to barely 2,300 in late December. Companies worth billions at their initial public offering (IPO) were suddenly worth nothing at all. US dot.com top dog Pets.com was put down, losing US$300 million of venture capital. Boo.com burned through $135m in 18 months before going bankrupt (taking my cabbie’s retirement dreams with it). Online retailer Amazon’s stock plunged from $107 to just $7, but it survived, as did eBay. More than $1 trillion was wiped off global stock values. Within a year, the world was in recession.
Tech is back
It took the best part of a year for the dot.com bubble to deflate, and many more years before the recovery properly set in, but it got there in the end. The Nasdaq is now booming again, with a total return of 125 per cent over the past five years. It has beaten its all-time high more than 20 times this year to stand at 6,247 at time of writing.
Amazon stock hit $1,000 in May, up 44 per cent in the past 12 months alone. If you had invested $10,000 a decade ago, you would have $160,000 today.
This is making analysts increasingly suspicious. Bank of America Merrill Lynch chief investment strategist Michael Hartnett warned in May of a speculative frenzy as the sector hit highs last seen during 2000, warning that “we are in the very early stages of an overshoot”.
Another Dr Doom, Marc Faber, editor of The Gloom, Boom & Doom Report, has warned that the meteoric rise of Facebook, Apple, Netflix and Google, collectively known as the FANG stocks, has left markets dangerously overvalued and share prices could fall 40 per cent from here.
The bull market has been running for more than eight years but the show is being kept on the road by a small number of US-listed technology behemoths. The FANG stocks plus Microsoft are responsible for almost 40 per cent of the gain in the S&P 500 Index in 2017.
They have added a total of $600 billion of market capitalisation this year, the equivalent GDP of Hong Kong and South Africa combined
News that Jeff Bezos, who is now worth almost $80bn and the world’s second wealthiest person behind Microsoft co-founder Bill Gates, sold one million Amazon shares worth $941m in May, which added to the climate of fear.
Fawad Razaqzada, a technical analyst at foreign exchange specialists Forex.com, warns that bull runs like this have a habit of ending abruptly. “If technology falls, it will undermine investor confidence and drag almost every major global index lower.”
Then on June 9, the long-feared sell-off began, sparked by Goldman Sachs’ chief investment officer Robert Bouroujerdi’s warnings about inflated tech valuations. Apple’s shares fell 4 per cent, knocking more than $30bn from the market cap of the world’s most valuable company. Google parent Alphabet, Facebook and Amazon each fell 3 per cent, while Microsoft dipped 2 per cent.
There was a brief panic – then markets settled, and started climbing again. Mr Razaqzada says the question now is whether this is the start of the correction, or merely a pause in what remains a strong bullish trend. “If we see further breakdown of support levels things could get ugly really quickly. So far, it has held up well.”
Beware the bandwagon
Chris Beauchamp, the chief market analyst at online trading platform IG, which has offices in the UAE, warns that tech stock latecomers are vulnerable to a slowdown or dip. “However, those rushing to proclaim the demise of the tech rally need to be careful – there will be plenty of dip buyers out there who have been waiting for a pullback,” he says.
That is exactly what happened after the June 9 stumble. “Buyers rushed in to defend the Nasdaq 100 lows around 5640 which then quickly rebounded above 6000 to hit today’s highs.”
Peter Garnry, head of quantitative strategies at Saxo Bank, does not expect a technology crash. “You need a trigger and currently it’s not there.”
The sector has outperformed year-to-date and looks overextended on the charts, but there is positive news too. “The earnings momentum is there and the alternatives are unattractive for long-term investors. As a result, the rotation into technology stocks remains strong.”
Calling a market crash is near impossible at any time and in this case you would be betting against strong momentum in biotechnology company share prices and earnings, as well as healthy investor inflows, Mr Garnry says. “It doesn’t look like a winning bet to me.”
The big technology stocks are also making big money, so their forward valuations look far from stretched. “Alphabet trades at only a small premium to the S&P 500, whereas Apple is actually trading at 25 per cent discount,” he adds.
Facebook may trade at a 20 per cent premium but that can be justified by forecast revenue growth of 40 per cent over the next 12 months, against 5 per cent across the S&P500.
Mr Garnry notes that Amazon is trading at 50 per cent premium to the wider market and is in danger of having bubble-like valuations: “However, the key issue is that the alternatives to technology are not that attractive as most other stock market sectors and industries have lower growth. “Government bonds offer around 1 per cent and investment-grade corporate bonds offer around 2 per cent. So what’s the alternative?”
Though he admits some parts of the technology sector could suffer a setback. “Cloud-based companies, IT security and software companies are trading at very high multiples which may likely not be sustainable if we see a slowdown in the global economy.”
Growth story
Tom Stevenson, investment director for personal investing at Fidelity International, says there are worrying parallels with the original dot.com bubble. “Nasdaq is outperforming the broader market, just as it did in 1999. Also, growth is concentrated in a narrow group of companies, a typical sign that we are near the top of the market.”
The dot.com bubble saw massively over-subscribed IPOs, similar to what we are seeing today. “Investors have lost interest in traditional valuation metrics,” says Mr Stevenson. “Witness Snapchat’s recent flotation, and subsequent volatility. Netflix combines strong subscriber growth with big cash outflows.”
However, Mr Stevenson sees notable differences too. “The euphoria of 1999 is almost wholly absent. Today’s enthusiasm for technology stocks is not really rose-tinted optimism but a grudging belief that in a sluggish world the sector is one of the few places that investors can find reliable growth.”
Another key difference is that in the 1990s, there were just 300 million internet users. Today, there are more than three billion, 10 times the amount, many of whom could not live without their smartphone. The big players are making huge sums of money, for example, Apple posted quarterly revenue of $52.9bn in the three months to April 1 this year. In its latest quarter, Alphabet’s revenues totalled $24.75bn.
Valuations are high but nothing like the 1990s. “Apple trades at around 17 times earnings, which is close to fair value whereas during the bubble, Oracle, for example, traded at 140 times earnings. It lost 86 per cent of its value in the crash. Disruptive technologies deserve high valuations.”
Technology companies can enjoy massive growth while working through relatively small amounts of capital. “It took hotel chain Marriott 70 years to get to 700,000 rooms. Airbnb has 1.5m in just seven years,” Mr Stevenson adds.
Finally, Mr Stevenson says there is little of the froth that we saw last time round. “The mood music is more subdued and sceptical than 17 years ago. Tech provides growth in a low-growth world.”
Global stock markets are nearing exhaustion after a lengthy bull run and it is clearly a concern that investors are effectively gambling on the fortunes of just five major companies: Apple, Facebook, Google, Microsoft and Netflix.
This is not the time to throw large sums into the market, expecting it to repeat its magic. However, calling a crash is a thankless task. Even if you are right, you are likely to get the timing wrong.
The key is to make sure you are fully diversified, by spreading your investments between stocks, cash, bonds, property and other assets, and only invest in shares you will not need for at least five or 10 years.
Technology stocks could bomb again, but just like last time, they will also bounce back.