Is There Another Tech Bubble?

Updated on

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?

Get The Timeless Reading eBook in PDF

Get the entire 10-part series on Timeless Reading in PDF. Save it to your desktop, read it on your tablet, or email to your colleagues.

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 which intended to replace cash and credit cards with “flooz bucks” or 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 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.

No Company Profiled

No Company Profiled This Month.

About Our Portfolios

The Capital Appreciation Fund and the Dividend Fund are innovative, investor friendly alternative to traditional actively managed mutual funds called a Spoke Fund ®. We can also customize portfolios for clients seeking less risk and volatility by including allocations to other asset classes such as bonds and real estate.

Spoke Funds are significantly less expensive and more transparent than a large majority of mutual funds. Both portfolios are managed for the long term using value investing principles. Fees for both portfolios are 1.25% of assets annually. That figure includes both our management fee and all trading costs. We try to minimize turnover and taxes as well in both funds.

Investor accounts are held in your name (we never take investor money) at FOLIOfn or Interactive Brokers*.

For more information visit our website.

*Some older accounts may be custodied at TradePMR.


Historical results are not indicative of future performance. Positive returns are not guaranteed. Individual results will vary depending on market conditions and investing may cause capital loss.

The performance data presented prior to 2011:

  •  Represents a composite of all discretionary equity investments in accounts that have been open for at least one year. Any accounts open for less than one year are excluded from the composite performance shown. From time to time clients have made special requests that SIM hold securities in their account that are not included in SIMs recommended equity portfolio, those investments are excluded from the composite results shown.
  • Performance is calculated using a holding period return formula.
  • Reflect the deduction of a management fee of 1% of assets per year.
  • Reflect the reinvestment of capital gains and dividends.

Performance data presented for 2011 and after:

  • Represents the performance of the model portfolio that client accounts are linked too.
  • Reflect the deduction of management fees of 1% of assets per year.
  • Reflect the reinvestment of capital gains and dividends.

The S&P 500, used for comparison purposes may have a significantly different volatility than the portfolios used for the presentation of SIM’s composite returns.

The publication of this performance data is in no way a solicitation or offer to sell securities or investment advisory services.

Article by Ben Strubel, Strubel Investment Management

Leave a Comment