At the outset, I would like to clarify that I am not a flag bearer of an impending bubble which will burst, but just a few observations between the dot com bubble and 2020, especially in terms of IPOs and their valuations.
So, for anyone unaware, the late 1990’s/ early 2000’s was an interesting time, especially if you were an internet company. Lofty valuations, crazy analyst expectations, all of it was a given, if you had a “dot com” in your name. And add to that a time of relatively lower interest rates.
After a stupendous rally, of course, it didn’t end well.
The bursting of the bubble led to the Nasdaq index (tech based index in US), correcting by a whopping 50%, when the bubble burst in 2000-2001.
Well, fast forward 20 years, to 2020. Life in the time of Covid has been a boon for tech companies. Be it web meetings, cloud storage, software companies and the like. Futuristic themes such as electronic vehicles have also been gaining traction. Add to that macros such as virtually endless supply of funds by the Fed, along with lower interest rates, and voila, you have all the ingredients in place for another bubble in the making.
Let’s not stick to hearsay, and let us look at some data. All the below data is with regards to US companies.
1) Spike in number of IPOs
It isn’t difficult to see a spike in the number of IPOs in the second half of the 1990’s. Anything going public with a “dot com”, in its name, would sell like hot cakes.
2) What earnings? Premium valuations for all things tech!
The spirits with tech were so high, that even the earnings did not matter. Close to 80% of stocks listed in 1999 and 2000, were loss making companies, with nearly 70% being in the so called hot and fast growing tech industry.
And it wasn’t just with earnings!
Can you guess which 2 years have had IPOs with the highest ever Price to Sales ratio, from the period 1980 to 2019? 1999 and 2000, of course!
A price to sales ratio of 30 means you’re paying $300 for a stock, which has just $10 of sales!
3) And brave-hearts applying for these IPOs, were rewarded with staggering gains!
If applying for IPOs of such companies was not crime enough, the markets rewarded investor absurdity with further listing gains!
There is no amount of logic that can explain the euphoria of tech stocks during the early 2000’s.
This one image, as a summary, just proves everything that was wrong during 1999-2000.
Okay, but what does the original tech bubble have to do with 2020?
Well, if IPOs are taken as a metric, everything.
But, before IPO’s, let us gauge the room, that is the US Capital markets itself.
With instances of bankrupt companies doubling in a day, shares rising on news of stock splits, constant support by the Fed, the rise of the retail traders led by Dave Portnoy, or just the belief that stocks are considered to “only go up” ,
I mean, a company with 0 sales is listed at a valuation of $26 billion just on the basis of pre-orders and hype?!
US markets have been anything but close to economic and systemic reality. And once the music stops, some investors may be leaving the capital markets for a long time.
Well, speculation aside, let us see some data about 2020, this time.
Here are a few of the biggest IPOs of 2020:
The lofty price to sales, negative earnings, FOMO leading to added listing gains and the head on focus of all businesses on tech, smells like we’re headed for trouble.
While there are analysts out there, who are pointing out similarities with the original tech bubble, the only solace they have is in the fact that “it isn’t as bad yet”, in terms of valuations to call it the same as 2000’s.
Is it a bubble? Does it burst? Does it not? Does it extend for years before bursting, like in 2000’s? Well, my guess is as good as yours!
I would like to end with a brilliant quote from a blog post by Morgan Housel:
“Everything feels unprecedented when you haven’t engaged with history”