Will We See Another Dot-Com Crash In Tech?
June 05, 2020
Beth Kindig
Lead Tech Analyst
This article was originally published on Forbes on May 15, 2020,12:42am EDT
Tech’s comeback since March has been nothing less than spectacular considering the backdrop of record unemployment and contracting GDP. According to a survey of fifty companies by FactSet, 60% had withdrawn guidance for the year. FactSet also estimates that the S&P 500’s earnings for 2020 have fallen 22% since the beginning of the year, while 2021 earnings have declined 13%.
Meanwhile, many tech stocks have reached all-time highs including one-day moves of up to 40% even when companies withdraw guidance. Twilio, for instance, rallied from $122 to $170 based on an 11% revenue surprise with total returns of 140% in the past two months. Twilio is hardly the exception with Teladoc up 115% and Fastly’s one-day move of 40% on May 7th.
Last month, Goldman Sachs analysts said in a financial note that the S&P 500 index concentration in the top tech companies—Facebook, Amazon, Apple, Microsoft, and Alphabet— was the greatest it has been in 20 years. Meanwhile, these mega-cap companies have reported mixed earnings results (Amazon) or pulled second quarter and full-year guidance (Facebook and Apple).
In a picture, this is what that looks like:
Tyler Durden, Zero Hedge from the article “"Poor Decisions" Galore As Newbie Millennial/Gen-X-ersPour Into Expensive Stock Market: https://www.zerohedge.com/personal-finance/poor-decisions-galore-newbie-millennialgen-x-ers-pour-expensive-stock-market
The saying “history does not repeat but it rhymes” has not yet applied to the dot-com bubble, when five years of euphoria burst into a 78% drop in prices over two years. Tech has largely gone unscathed as it has bumped oil from being the number one industry.
There is some solid support as to why this is not a tech bubble. Mainly, technology now runs nearly every industry. The second reason is that higher valuations are more sustainable today as the revenue growth from tech is much higher than other industries.
Tech Industry Growth has 40-80% growth with outliers up to 148%
TWITTER HTTPS://TWITTER.COM/SAXENA_PURU/STATUS/1256748503050539008
Versus other industries with 1-9% growth with outliers up to 17%
TWITTER HTTPS://TWITTER.COM/SAXENA_PURU/STATUS/1256748503050539008
In addition, cloud software and platforms also allow companies to scale proportionate to revenue growth. There is less overhead and this helps companies keep costs low as you can scale quickly in either direction.
Nearly a decade ago, Marc Andreessen famously said “software is eating the world” in an essay that spelled out how software was disrupting nearly every industry with “real, high-growth, high-margin, highly defensible businesses.” He questioned the low PE ratios of companies like Apple, which at the time was trading at 15 P/E. Notably, Andreessen’s essay came in close proximation to Facebook’s public offering, as well as Zynga, Groupon, Skype and many other exits for his firm’s portfolio.
Sign up for I/O Fund's free newsletter with gains of up to 403% - Click here
At the time, he pointed out that fast-growing companies like Facebook and Twitter were conjuring up memories of the dot-com bubble in 2011: “With scars from the heyday of Webvan and Pets.com still fresh in the investor psyche, people are asking, “Isn’t this just a dangerous new bubble?”
Perhaps just as dangerous as thinking any fast-growing tech company with a high valuation is not a bubble is the idea that any fast-growing tech company with a high valuation is a bubble. This is because the market has a way of doing what you least expect.
Pre-Pandemic, Silicon Valley Grew Quiet
If looking at the number of IPOs, we are not in a bubble as the years 2018-2019 saw less than half the number of IPOs during 1999-2000.
Beth.Technology
However, the value of IPO exits does look bubble-like. According to Pitchbook, the value of exits for venture-backed companies hit a record $256.4 billion in 2019. 82 venture-based IPOs accounted for 78% of the total value, or $198.7 billion – more than the previous four years combined (this was partly due to Uber and Lyft).
The exits were successful for venture capitalists as the $223 billion in post-money valuations came from $35 billion in venture investment, or a return of 637%. In turn, this means the public markets paid a significant premium.
Also, the years that followed the dot-com bust saw a serious leveling off. It is the absence of early stage deals in tech right now that is more concerning. Pre-pandemic, Silicon Valley was already noticeably quiet.
Forbes also recently reported on the slowdown in venture capital being ill-timed with the effects of the coronavirus forcing many startups to shut down. This followed a 16% drop in venture capital deals in Q4. The CEO of Starsky Robotics stated, “the downpour of investor interest became a drizzle.” As the article points out, the failure rates of 2020 could end up resembling 2001.
Recently, I published on the lack of venture funding in the Series A and Series B stage for tech companies. When combined with the data on initial public offerings from last year, we see a clear signal from venture capitalists that the exit window may be closing (or is already closed).
For instance, as reported by The Information, early-stage software deals in 2019 declined from 388 deals down to 279. In the seed stage, the number was below 200, or the lowest in six years. According to Inc.com and CB Insights, the estimate for Series A funding has dropped from one in three startups to one in six startups with an estimated 1,000 startups not receiving funding this year.
Meanwhile, the public market is flooded with high growth software companies that report over 40% growth due to an inverse law of small numbers. Basically, it’s easier to post rapid growth early-on but harder to sustain this growth.
Conclusion:
Many investors focus on valuations as the indication for a bubble. As pointed out, this can be misleading as hypergrowth companies are often outliers. In fact, the companies that challenge key metrics the most are often the ones that see the most upside. Amazon and Netflix are prime examples.
Valuations aside, there is a glut of high-growth software companies on the market that have not been tested by a less-than-ideal economy or slowing business cycle. This may not create a bubble, but it can create losses for both institutional and retail investors as the market attempts to guess the winners and is confronted by those that fizzle out.
The more that startups shut their doors, as well, the fewer cloud software customers there will be as the two ecosystems are closely intertwined. The recent pullback in March did not afford the opportunity to find the stable winners before hyper-speculation resumed.
Gains of up to 2,390% from our Free Newsletter.
Here are sample stock gains from the I/O Fund’s newsletter --- produced weekly and all for free!
+2,390% on Nvidia
+450% on Bitcoin
*as of Jun 25, 2024
Our newsletter provides an edge in the world’s most valuable industry – technology. Due to the enormous gains from this particular industry, we think it’s essential that every stock investor have a credible source who specializes in tech. Subscribe for Free Weekly Analysis on the Best Tech Stocks.
If you are a more serious investor, we have a premium service that offers lower entries and real-time trade alerts. Sample returns on the premium site include 3,900% on Nvidia, 850% on Chainlink, and 695% on Bitcoin. The I/O Fund is audited annually to prove it’s one of the best-performing Funds on the market, with returns that beat Wall Street funds.
More To Explore
Newsletter
Nvidia Stock Is Selling Off: It’s Not Because Of Blackwell
Direct liquid cooling doesn’t lie as it’s intricately linked to the Blackwell launch, implying that Blackwell would indeed ship by Q4 – and Nvidia just confirmed that (multiple times) in Q2’s release.
Nvidia Stock: Blackwell Suppliers Shrug Off Delay Ahead Of Q2 Earnings
Bulletproof Nvidia showed an unusual bout of weakness this past month following a report from The Information that Nvidia’s new AI chips are delayed. The report asserts that Nvidia’s upcoming artifici
Arm Stock: Buy Its Customers, Not The Stock
Arm Holdings is the third-best performer of 2024 in AI-related semiconductor stocks with a 56% YTD return, behind only Nvidia and Taiwan Semiconductor.
Big Tech Battles On AI, Here’s The Winner
The major theme over the past month in Big Tech and AI semiconductors has been the durability of demand: essentially, what is Big Tech’s return on more than $150 billion in capex over the last twelve
Bitcoin Update: Next Stop $100,000
Bitcoin is the best performing asset in market history. There is no stock or asset that has come close to delivering the returns of this digital currency --- it has greatly outperformed all FAANGs, an
Mag 7 Stocks Should See One More High
Optimism around the Fed could spark a continuation of the relief rally in the Russell 2000 and further rotation out of the Mag 7. Below, we look at the pros and cons of a Mag 7 rotation and how we pla
Palantir’s Stock Is Priced For Perfection
Heading into 2024, Palantir was exhibiting “multiple signs of acceleration” stemming from strong growth in its US commercial segment, driven by AIP, Palantir’s Artificial Intelligence Platform that le
Tesla’s Q2 Deliveries Strong, But What’s To Come?
After months of being the lowest performing Mag 7 stocks, Tesla saw rapid gains — up 42% in a one month rally, with 37% of those gains in eight sessions — after it reported Q2 deliveries ahead of expe
How to Participate in Tech: The Million Dollar Question (Video Highlights)
With audited returns of 131% since inception, compared to the NASDAQ-100’s 82%, portfolio manager, Knox Ridley, lays out how we have successfully maintained an overexposure to the right tech stocks, w
This AI Stock Could Outpace Nvidia’s Returns by 2030
Lead Tech Analyst and CEO Beth Kindig recently joined Real Vision’s Nico Brugge to discuss her AI outlook on leading AI stock Nvidia, while sharing which AI stock she believes may outpace Nvidia’s ret