Spectre of the dotcom crash haunts bad day for Big Tech
Shares fall in Silicon Valley giants but many believe it’s no throwback to the year 2000, says Michael Cogley
The unrelenting rise of the world’s biggest tech stocks came to an abrupt halt on Wednesday. Finally, vindication for bears swearing the run on Silicon Valley’s top names was nothing more than a repeat of the dotcom bubble that shook the industry 20 years ago.
Big Tech has spent the year dragging the value of the Nasdaq upwards, but this week it led the first “bad day” on Wall Street since June.
Elon Musk’s Tesla, which had to split its shares last month because they had become so expensive, saw its stock plummet by around 15pc between Wednesday morning and the European close yesterday, before later recovering. Cupertino giant Apple was also hit, slipping more than 10pc, less than two weeks after chief executive Tim Cook sold $131.7m (£99m) worth of stock in the company.
Google and Facebook dropped 5pc and 4pc respectively while Amazon – the white knight of lockdown – fell by more than 6pc.
The market rollercoaster continued yesterday as the Financial Times reported that Softbank was the “Nasdaq whale” that has driven high levels of price inflation among tech stocks. It is believed the Japanese investment giant has poured billions of dollars into tech options that may have led much of the rally in prices in recent months.
But in a year that has seen many investors made considerably more wealthy thanks to their bets on tech, the ongoing sell-off looks more like profit-taking than a throwback to the turn of the millennium crash that wiped out 78pc of the value of the Nasdaq. Here are three reasons why.
Tech’s outperformance is not as outlandish as in 1999
Throughout the Nineties investors speculatively poured cash into pretty much anything with a “dotcom” attached to its name, insisting that the internet was the future. To one extent, they were right. The tech sector’s price to earnings (PE) ratio – which is a measure of how much a company earns compared to its share price – is high this year. Currently it’s around 90pc greater than the average of the rest of the market, according to Capital Economics.
While that may raise some eyebrows back in 2000 the PE ratio was almost 250pc that of the rest of the market.
“Big tech’s valuation has risen steadily for a few years and it’s quite big now, but it’s clearly not in the same league as the IT sector when the dotcom mania was in full swing,” says Oliver Jones at Capital Economics.
“This is one reason why we remain wary of the idea that big tech firms’ share prices will soon collapse under their own weight.”
To some, the sell-off could have been sparked by those viewing the stocks as overvalued.
Helal Miah, at The Share Centre, says that some stocks could have been dumped for more “old economy” bets that had taken a beating during the pandemic. “The big question is whether this is just a mini correction or something more significant,” he says. “A more material correction may be on the way but I am inclined to think that this is just a modest and healthy adjustment, the main reason being that nothing has fundamentally changed in the last few days.”
‘The bottom line is this: the pandemic will end in 2021 but easy money policies from central banks won’t’
2020 rally is backed up by outsized earnings
Perhaps one of the biggest differences between this year’s run and the turn of the millennium is the fundamentals of the businesses involved.
Apple, Amazon, Facebook and Google all report enormous profits and boast extremely strong balance sheets.
Apple had more than $200bn in cash on hand at the start of the year. It reported more than $11bn in profits in the second quarter, Microsoft $11.6bn, Amazon $5.2bn. And, fundamentally, most of these technology giants have had extremely robust profits for years. Unlike in 2000, when almost all internet stocks were minnows, many of them with no revenues or profits to speak of.
The coronavirus crisis has also driven a lot of growth in tech companies as more and more people began working remotely. Companies like messaging app Slack and video conferencing software Zoom became even more popular as tools that kept working life alive shot to prominence.
Markets are expecting more stimulus from central banks
Dropping a mother lode of cash has been the go-to policy for many central banks across the world in the hope of getting economies back on track.
On Thursday, the French government unveiled a €100bn (€89bn) four-year stimulus package in an effort to boost the economy and keep the recovery moving.
In the US this week, the S&P 500 index was boosted by suggestions that Steve Mnuchin, the Treasury secretary, was in talks over the extension of its support scheme for the unemployed. The European Central Bank has also indicated its desire to help lift the region’s economy with massive bond purchases.
Forexlive’s Adam Button is bullish about the continuation of the tech rally due to likely stimulus measures. “The bottom line is this: the pandemic will end in 2021 but easy money policies from central banks and governments won’t,” he says.
Around 2000, there had been some stimulus injections due to fears over the Y2K bug.
However, this abruptly trailed off, leaving overvalued tech stocks caught in the open.
All of this means that this week’s sell-off looks more like cautious investors reducing risk rather than identifying fundamental flaws with the world’s largest tech businesses.