With IT being one of few sectors that have continued to deliver stable results amid the Covid-19 recession, analysts and investment advisors alike have urged for caution as some have feared a repeat of the 1995-2000 tech bubble that ultimately burst in 2002 when 80% was wiped off the stock market. However, as some more level-minded commentators have pointed out, the differences between 2002 and today outnumber the similarities as private and institutional investors alike have a better understanding of how digital services work now than 18 years ago – and P/E ratios have been more reasonable lately than they were during the dot-com bubble.
As difficult as it is to imagine a world without the internet, the medium as we know it today only took off in earnest with the event of Windows 95 and the Netscape browser. The tech bubble began with Netscape, the company behind the browser, which was loss-making at the time of its IPO but still saw its share price increase from $28 to $75 within the first few hours of trading. Netscape would be joined by other tech and software companies which had underlying structural problems but still saw their share prices skyrocket – investors jumped at the opportunity to buy stocks in any company with the prefix “e-“ or suffix “-com”. The tech companies spent millions on advertising campaigns but failed to make a profit and in 2000, valuations began to fall. Between 2000 and 2002 Nasdaq fell by 80% – and the dot-com bubble burst.
In its infancy, the internet seemed to offer unlimited possibilities and so it us understandable that investors felt optimistic. Cut-throat competition and limitations in what consumers and corporate users were actually willing and able to do with the new medium limited the potential of many tech companies, and start-ups with poor finances were generally not in a position to compete with giants such as Microsoft, IBM and Apple who already had been established for decades.
The proliferation of smartphones and 3G as well as fast broadband around 2010 enabled a new wave of innovation and saw a rise in social media users and online streaming services. Some pre-existing firms, such as Facebook and Netflix have been able to tap into this new market while newcomers such as Uber and Lyft offer services that would have been unviable without smartphones. While tech start-ups have proliferated in recent years, many stay away from the stock market precisely because they are not yet profitable – food delivery service Deliveroo being one example. Cab-hailing app Uber’s IPO and subsequent plummeting stock price served as a lesson to many others.
While it could be argued that the fall in value of stocks from Uber, FitBit and other tech start-ups is tech bubble 2.0 starting to burst, a broader view calls for another assessment. As noted, start-ups have not seen their stock prices surge when going public, but rather plummet immediately. Unlike in 2000, investors are more aware of the differences between tech firms and the services they offer – simply having an “e-“ or “-com” in the company name does not make investors queue up to buy stock – and investors also know that corporate IT is a larger market than products directed as consumers. As an illustration, Amazon earns two-thirds of its revenue from its cloud computing platform and not from physical sales or video streaming.
Among the IT stocks on the S&P500 index that have seen the highest increase in the last decade, we find Apple, Alphabet (the owner of Google), Amazon, Facebook, Mastercard, Microsoft and Visa. These continue to deliver robust returns.
Taken together, the buzz word “the winner takes it all” seems to ring true as tech giants, with their relatively high P/E multiples are in a position to dominate the market and acquire promising start-ups. How their domination will impact the stock exchanges remains to be seen, but for the time being it seems unlikely that their stocks would collapse.