I’ve recently been hearing a lot of questions about whether or not we have another tech bubble. It’s understandable for investors to be worried. After all, we have had two stock market bubbles in the past two decades and people are invariably nervous about the possibility of another bubble. We know about the popularity of the “FANG” (Facebook, Amazon, Netflix, and Google) stocks and how just a few stocks have been driving most of the market gains this year. As I’ve been writing this letter tech stocks have fallen by a few percent each of the past two days so this subject has become even more relevant. So do we have a tech bubble?
I’m going to answer with an emphatic “no”.
In the first tech bubble we had stocks that weren’t making any money doubling and tripling in one day. You had a company change its name to add “dot com” and its stock would double. You had companies being valued on made up metrics like “eyeballs” and “clicks”. You had insane business models like Flooz.com which intended to replace cash and credit cards with “flooz bucks” or Webvan.com which attempted to build out a grocery delivery network from scratch in 10 cities at once. In fact, most of the dot com companies lost money.
Today, most tech stocks make money. Last year Apple brought in an average of almost $125 in cash every minute of every day during the year. Google is expected to grow earnings at a double-digit rate. Amazon is taking market share from just about every brick and mortar retailer. Even some “old school” tech companies like Microsoft are doing well. The tech sector today is generally characterized by companies generating positive cash flow and growing at above average rates.
In 1999, there was over excitement about potential new business models. Investors didn’t do a good job separating the crazy sock puppet businesses (who can forget the Pets.com mascot) from the legitimate good ideas. In 2017, we have excitement over successful business models that we know work.
Sure, there are exceptions like Tesla. General Motors sold 125 times more vehicles in 2016 then Tesla and GM actually generated a profit, yet Tesla is valued at more than GM! Graphics card maker NVIDIA trades at almost 40 times forward earnings, more than double the multiple of the overall market. But tech companies like Tesla and NVIDIA that might be overvalued are rare and if and when their stock prices return back to earth they are highly unlikely to effect the entire stock market.
What about the fact that the top 5 big tech stocks account for about 40% of the stock markets gain so far this year? Surely that has to be a sign of a bubble. Not really, it’s actually normal for only a handful of stocks to account for most of the market’s return each year (this is why diversification is important, it increases your chance of owning the winners).
I don’t see any reason why investors would have to fear another tech bubble at the present time.
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Article by Ben Strubel, Strubel Investment Management
