Dot-com 2.0?

August 28, 2020

With revenues resembling the GDP of small nations, and cash on hand sometimes above that of the United States Government¹, the big six technology firms have risen to a level of unprecedented economic and social power.

The market has noticed, driving the values of these six firms exponentially skyward, with their valuation now comprising half of the Nasdaq 100. The relative performance of the Nasdaq 100 vs the S&P 500 just reached the same rate it did at the top of the dot-com bubble.² And within the S&P 500, the top five tech companies are worth over a quarter of the value of the entire 500-firm index.

Is it time to get out the pets-dot-com sock puppet? Is this a bubble, and if so, is it going to pop?

Not necessarily. First, keep in mind the fundamental lesson: the market is a world-wide voting system, and millions of investors have decided these firms are worth high valuations. Other investors think these near record-high valuations are crazy, and they are selling. But the end result of the voting is where they are today.

Unlike dot-com's, these firms print money. They have built economic moats by deeply integrating themselves into our lives. They have talented management teams that found power disrupting old-school business and they don't plan to cede their advantage easily. Unlike the dot-com era, the risk-free rate on the bond side is on the floor and the government shut down many of their small competitors, given them tailwinds.

But there are problems as well. These firms are larger than they were in the dot-com era. The revenue of Apple is higher than the GDP of Greece, for example. Growing from that starting point is tough. Some Senators get mad at them and call for breakups, the main concern being a European regulator will not have their Airpods in and will be listening. With the exception of Amazon, revenue growth isn't stellar, and in the case of Apple and Google, it's mid-single-digits. Dividends, if they exist, are meager.

Capital has drained from other sources to fuel this rise. But trees don't grow to the sky. While we don't know when this accelerated rise will end, at some point it will slow, go sideways, and likely fall. The investors of Intel have just over half their money after inflation twenty years after the dot-com peak, and investors in Oracle are roughly even. The oil companies that dominated the S&P 500 in the 1980's are fading away.

In the meantime, capital will move to other sources of more promising return, and the cycle will begin anew.

Dan Cunningham

1. Not now. But at times Apple's cash has been 2X that of the United States. Daily U.S. Treasury statement from August 25th is here.
2. Source: The Stocks to Rule Them all. Visual Capitalist