A major question on the minds of investors today is, “will this market end badly? Like it did in 2000?” This market may seem disconnected from reality. The market is at, or near, all-time highs. At the same time, the US is suffering from the ongoing pandemic and extreme unemployment. With technology leading the pack by a wide margin, are we heading towards another dot-com bubble? Let’s take a closer look at the details.
Let’s start by listing some of the similarities and differences between 2000 and 2020:
- Special purpose acquisition company (SPAC) initial public offerings every week. If they weren’t explicitly called SPACs at the time, they were companies that raised money on the name alone.
- Many IPOs doubled or tripled in a short time.
- Many companies have lots of cash but no business model.
- The belief that we can do everything via the internet.
- A record number of new billionaires minted.
- Speedy and persistent rising stock market prices – particularly in companies ending in .com.
- SPACs that give access primarily to talented investors (Chamath, Ackman.)
- Sustained price increases of 5x to 10x for years (Shopify, Wayfair, Tesla.)
- Companies with lots of cash raising debt below 1% (Google completed a 10B deal at record low rates this week.)
- Surprisingly, we can do many things exclusively via the internet: health, meetings, selling, distributing, etc. – more than thought possible.
- A steady stream of new billionaires minted who have come up with genuinely new ideas.
- Technology companies are now perceived as defensive or stable, due to their anti-fragility during COVID.
- The price to earnings ratio in 2000 was 40.2x for the top 50 companies in the US and 19.0x for the bottom 450 companies. Today that ratio is 25.7x for the top 50 and 20.8x for the bottom 450. Thanks to Jurrien Timmer of Fidelity for pointing this out.
There are multiple asset bubbles every year.
In 2018 a VIX derivative bubble popped, and the holders of the popular TVIX product lost $4B overnight. In 2017, Bitcoin hit $20,000 and promptly fell -85%. Many other cryptocurrencies failed, along with the ultra-hot initial coin offerings (ICOs) market. Marijuana stocks popped in 2018 when Tilray fell from $150/share to $8/share today. That’s just a handful of speculative asset bubbles from the last few years. There are too many to list here.
“Customers are divinely discontent. Their expectations are never static – they go up. It’s human nature. Yesterday’s ‘wow’ quickly becomes today’s ‘ordinary.’” – Jeff Bezos. Short term speculators exist because competition in investing is fierce, and no one wants to feel average.
We’ve seen tremendous speculative trading this year in companies like Nikola, Kodak, Hertz, Virgin Galactic, and many others. For context, Nikola’s mere promise to make electric trucks someday allows it to trade with a $14 billion market cap. Trump announced last week that Kodak is going to help with coronavirus vaccines, their stock price went from $2 to $42 in 48 hours on that news alone.
Hertz is bankrupt, but that hasn’t stopped traders from treating it like a hot IPO. Virgin Galactic is an inspiring company with talented leadership and long term innovation potential. However, Virgin Galactic’s earnings came out this week with $0 of revenue for the quarter. It trades at a $4.6 billion market cap.
Macro vs. Micro
When analyzing this market, it’s tempting to think in terms of macro-economics. Examples include: “This market is too high; therefore it must come down”, “the upcoming election will certainly disrupt this market”, “the value of this market compared to GDP is impossibly high”, or “this market is disconnected from the fundamentals.”.
I recommend looking at this market through a microeconomics lens – or as if you were the sole owner and operator of the business. Look at the business models and the pace of the innovation coming out of Apple, Amazon, Shopify, NVidia, Adobe, Alphabet, Cloudflare, PayPal, Microsoft, Facebook, to name a few. I’m not so sure that the management of these companies are as nervous as the average investor worried about today’s stock prices.
On the other hand, many established companies today are vulnerable to an extent never before seen. You can say that the recent bankruptcies are due to the virus. To a large extent, they are. The virus also exposed the weaknesses of Hertz, Nieman Marcus, Brooks Brothers, and others.
Large companies and technology-oriented companies continue to lead this rally. While valuations have expanded, the earnings power is real. We are nowhere close to the valuation levels of the 2000 bubble. We will be sure to let you know if that changes.
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