"With a good perspective on history, we can have a better understanding of the past and present, and thus a clear vision of the future." — Carlos Slim Helu
Millions will remember the dotcom crash back in early 2000's and the devastating impact it had on their wealth. Whilst millions more like me remember these events, there was no significant impact on our lives as we were not actively investing at the time.
Whilst I still don’t invest directly into technology stocks myself, part of my savings are in the form of pensions. As I have chosen ‘high’ as my attitude to risk, it would be naïve of me to think that should there be a crash, I would not be affected. I think millions of people are probably in the same boat as me.
The question on a lot of minds is ‘will the technology stock bubble burst’? So what are the similarities and differences between then and now?
In 2000, interest rates were much, much higher than they are now. The bank of England base rate was 6.00% and the Fed funds rate was 5.85% meaning investors had an alternative to stocks to get a decent return. Today, with an interest rate at 0.10%, investors and savers don’t have much of a choice in terms of risk free returns.
Quality of companies
Today’s tech giants Apple, Amazon, Microsoft, Google and Facebook account for c.18% of the US stock market in terms of market capitalisation, but nearly 25% in terms of profits. These businesses are of much higher quality and substance compared to any of the companies in the dotcom era. Yes, the shares in these companies are expensive but for a good reason. That is no reason for them to remain at the top of the market forever. It is almost certain that the values will go down as the markets cool down.
There appears to be a euphoria in the valuation of tech companies as there was in the dot-com era. AirBnB doubled market capitalisation on the first day of trading from $47 billion to $90 billion, a company that was valued at $18 billion a few months previously. The company has no assets and no profit forecast until 2023. DoorDash, a company likely to see the best days during the pandemic had a valuation that beggars belief in my opinion as well. It peaked at $65.4 billion in February 2021 and market capitalisation today is just shy of $40 billion. Even $40 billion represents a multiple of roughly 10x sales and over 300x the profit forecast for 2022. Recently, the Deliveroo IPO was not so successful with the stock falling 30% on the first day.
Quality of investors
The new generation of investors appear to be investing in companies based on their familiarity with the company rather than studying the financials underpinning the company. The investors are therefore all investing in the same companies, as they all follow the same social media platforms, so much so that the professionals may be forced to follow their moves.
Tax rate rises
It is understood that the Biden administration is seeking to increase the US corporate tax rate to 28% and will increase capital gains tax rate on the wealthiest Americans to 43.4% including a surtax to help fund infrastructure investments. The current top rate for capital gains tax is 23.8%. If the rates are to come into play in 2022, investors subject to a higher rate may choose to realise some of this gain in 2021, a move which will not bear well for the technology stocks.
I guess we enjoy the party while it lasts but at the same time, reduce risk so that when the bubble deflates or bursts, we may be able to capitalize.
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