INVESTMENT

Dot-com Redux: Is this technology “bubble” different?


20 years ago, the Nasdaq Composite Index was at its all-time high. On March 10, 2000, it rose above the 5,132 mark.

And then things broke down.

The dot-com bubble burst. From its impressive height, the NASDAQ composite sinks into a downward spiral, declining by about 75% over the next two years. It will take about a decade and a half for the index to return and surpass its previous peak.

Despite the recent instability, many investors today look to the Nasdaq and get the feeling of Daza Vu. They began to describe the performance of the index, which closed during the tech bubble in the late 1990s. Analysts tell us, the new technology’s loved ones’ assessment levels are “cracked,” “excessive”, and often “bubble-like.”

So what do we do to stop all this? Is the NASDAQ heading for another crash, a bust of the potential dot-com bubble ratio?

To gain insight into these questions, we compared the current technological landscape to the 2000 dot-com bubble era. To do this, we took all the Nasdaq-listed companies on 10 March 2000 and 1 September 2020 and divided all the technology-centric companies into 15 sub-industries. From this, we found the average price-to-book (P / B) and price-to-sales (P / S) ratios for each of the 15 categories and compared those values ​​at two different points over time.

Why these two assessment systems instead of price-to-earnings (P / E) ratio? This is because more than half of the companies in the 2000 sample had negative earnings and thus lacked usable P / E.

So what was the takeaway? What does comparative analysis tell us?


March 2000 P / B March 2000 p / s September 2020 P / B September 2020 P / S
Biotechnology 19.66 55.51 3.88 18.10
Communication equipment 10.27 67.67 2.01 1.19
Computer hardware 6.05 2.49 1.43 1.04
Electrical equipment 2.55 2.10 1.22 1.29
Electrical equipment 3.68 1.68 2.05 0.69
Electronic gaming 5.17 4.36 4.71 5.68
Information technology 3.68 1.56 3.19 0.93
Internet content 7.25 32.44 4.52 3.15
Internet retail 5.35 8.98 6.57 1.47
Scientific equipment 2.81 2.36 3.07 2.60
Semiconductor 13.85 12.76 3.32 3.95
Semiconductor equipment 10.92 6.56 3.75 4.52
Software application 10.57 13.39 5.64 3.99
Software: Infrastructure 9.07 8.71 6.44 4.38
Telecom 8.70 11.59 1.55 0.90

Quite simply, most tech sector divisions are still nowhere near the evaluation level of the dot-com era.

Indeed, on a P / B basis, the median tech sector firm’s valuation level in March 2000 was 100% higher than its September 2020. And on a P / S basis, mid-March 2000 tech companies had an over 200% valuation level.

There were only two tech categories evaluated in September 2020, which came in March 2000. Those were the electronic gaming and scientific equipment sectors. In electronic gaming, the September 2020 average company’s P / S rating is higher than its March 2000 predecessor. And the average scientific instrument company’s valuation on a P / S and P / B basis has surpassed it since March 2000.

With the exception of electronic gaming and scientific equipment, all 13 other technology departments received higher ratings in March 2000 than in September 2020. Significantly, the average P / S ratio of 152.5 of in the Internet Content class in March 2001 was 15.15 as compared to September 2020, while the P / B ratio of the average semiconductor firm was 1.8.5 in March 2000 and 32.32 in September 2020. 2.

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Our research shows that the current tech industry has not yet been able to replicate the additional assessment of limitations in the case of dot-com crashes, the level of their assessment is higher. In fact, in most subcategories, they outperformed the technology bubble in 1998 and 1999, surpassing them in almost all other years.

Of course, although the level of assessment should be doubled or tripled compared to March 2020, scholars will no doubt continue to make assumptions and sound the alarm. “Technology is very valuable and dot-com bubbles are coming to the region,” they warn.

But based on our analysis, such concerns overflow and it is safe to ignore such warnings. Whatever the current era for technical stocks, this is not a dot-com redux.

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All posts are the author’s opinion. As such, they should not be construed as investment advice, or the opinions expressed must not reflect the views of the CFA Institute or the author’s employer.

Image Credit: © Getty Images / egromov

Derek Horstmeyer

Derek Horstmeyer is a professor at George Mason University School of Business, an expert on exchange-traded funds (ETFs) and mutual fund performance. He currently serves as director of the new head of financial planning and asset management at George Mason and established the first student-led investment fund at GMU.

Chaitanya M. Biz

Chaitanya M.B. is a student who has a special interest in investing energy and data analysis and impact for financing. He is currently pursuing a bachelor’s degree from George Mason University and is exploring various roles in finance, from banking to money management.



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