Differences and similarities between 2000 and now.

by FinndBors

I want to list out a list of reasons why today is like the dot com times and ALSO what is different about today. I am not a financial professional, but I have been working in the tech industry for over 20 years. It is mostly tech stock focused.

I’m going to also add (fact) or (anecdotal) or (opinion) to my bullet points, so take those bullet points with the appropriate grain of salt.

Reasons we are NOT like the dot-com boom (roughly in order of importance):

  • (fact) Interest rates are much lower now and long term expectations on yield is also low. In 1999, the 10 year treasury was at around 5% and rose to over 6.5% in 2000. The P/E of the S&P 500 in 2000 was around 30. Which means that the 10 year treasury yielded MORE than the S&P 500 earnings. This is absolutely not true today with the 10 year treasury yield being around 0.6% and P/Es being around 25-30. This single point is extremely important to understand.
  • (fact) Late stage VCs are more of a thing now than they were in dot com. Thus you have fewer IPOs and the companies that do are more mature and less speculative (of course there are outliers, see below).
  • (fact) The NASDAQ P/E in 2000 was really quite ridiculous (I can’t find a chart for some reason, i think it was around 80). S&P 500 was more comparable between 2000 and now.
  • (anecdotes) You can no longer get a job at a startup / real tech firm just because you know HTML or can write “hello world” in Perl. A lot of firms back in the late 90’s were trying to fatten up the employee count and race to IPO to cash out. This doesn’t happen today.
  • (fact) There was no pandemic in 2000 and it makes comparisons hard.

Reasons we are like the dot-com boom (roughly in order of importance)

  • (anecdotes) Sentiment on the ground is very similar to what you hear during the dot com boom. We make fun of the people who invest in stupid shit like NKLA, HTZ, etc. But a lot of people are creaming their pants still on the big tech (FAMANG) saying they are forever-holds / they can’t go down, etc. You also now are starting to see intelligent, rational people putting money in things precisely because other people will and assume they can get out before it all falls apart.
  • (fact) In the late 90s, internet brokers were a new thing and made trading easier for people who didn’t know anything — and we see that today with COVID stay-at-homers and an influx of users into robinhood (I wish I could get hard numbers on the comparison). (opinion) Because of this, I’m fairly certain pricing is out of whack for a large number of companies.
  • (fact) The P/E ratios of the big techs today are higher than a lot of the big techs during 2000. Nasdaq P/E in 2000 was off the chart, but if you just look at the big profitable companies like INTC, ORCL, AAPL, HPQ, IBM, which were the equivalent of FAMANG today, they had P/Es mostly under 30s. FAMANG are around 35 except for Netflix and Amazon which are much higher (see huge caveat on interest rates above). CSCO and MSFT in 2000 were the outliers having P/Es of well over 60.
  • (anecdotes) In tech companies, a common business plan for new firms in the last ~8 years is to get market share at any cost and figure out profitability later. This is really no different from dot com when firms were valued by number of “eyeballs”.
  • (opinion) “this time is different”. At least in terms of technology, it’s not. The internet itself was a bigger “paradigm shift” than what we are seeing today. I used “paradigm shift”, because was a common buzzword that turned into a joke back in the late 90s and used to justify crazy valuations. Machine Learning is amazing, but not on par with connecting everyone on the globe. And the cloud is just a fancy name for running something on someone else’s computer (even though its quite nice how easy and seamless it is today vs. 20 years ago).
  • (anecdotes) While it is harder to IPO today without profitability or clear path to profitability, it clearly still happens (UBER, LYFT, SNAP). And others are using backdoor IPOs (NKLA, SPCE).
  • (fact) In 2000, the IT sector along with Media stocks and the Telecommunications Services sector approached 40% of the S&P market cap. The categories have changed but if you combine IT and Communication Services sectors, you get a 38% of S&P market cap today. If you add Amazon which is not included in IT/Communication, you get over 40%. Does this mean anything, especially since we are in a pandemic and more stuff runs on IT? Not sure.

You can definitely pick apart some of the individual points, I just wanted to lay them all out and see what people thought and if anyone has other valid comparisons. I personally think we ARE in some kind of tech bubble, but I’m not going to make a fool of myself in predictions on when and how it will burst. And fuck it, while I do have more in cash than typical, I’m still in VTI/VXUS and a bunch of individual tech names since I have the background to do some analysis on the business.

I’ll end with a few random thoughts:

  • In August 1999, a lot of people were looking at the craziness of the dot com boom and how people were throwing money at stupid shit. I don’t care what people say, it was pretty obvious something was wrong. If you shorted the NASDAQ then, you will watch the NASDAQ more than double in 7 months time and have your face ripped off.
  • Taking what I’ve posted as a whole, the one thing to be terrified about is if long term interest rates rise and the fed is either powerless or does not step in for whatever reason. This will completely destroy the stock and bond market. I don’t see the catalyst for it, but I’m no economic genius. You might be able to make an argument that gold is a hedge for this unlikely scenario. There is also the worry of a slump in earnings due to general economic malaise, but that is a garden variety concern that everyone is watching for and usually pretty temporary. Rise in interest rates would be real bad.

 

 

Disclaimer: This information is only for educational purposes. Do not make any investment decisions based on the information in this article. Do you own due diligence or consult your financial professional before making any investment decision.

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