Tech Isn’t A Bubble

I have made it clear that the current stock market isn’t like the technology bubble of the 1990s. The biggest reason is because technology stocks aren’t overvalued compared to their earnings. The most misleading chart that bears show is the chart of the Nasdaq which makes it look like we are in another bubble just because it has surpassed the 2000 high. It matters what you’re getting when you purchase the Nasdaq; price doesn’t indicate value. Now you’re getting stronger companies with more earnings. There are expensive stocks on a P/E ratio like Netflix and Amazon, but Apple, Alphabet, Microsoft, and Facebook have been minting profits. A great example of why this rally is different from 2000 is shown in the chart below. In the 2000s, information technology’s market cap as a percentage of the S&P 500 soared while earnings didn’t reach the same level as a percentage of the market. Now earnings and the market cap are about the same percentage of the overall market.

To further kill the narrative that we are in a second technology bubble, the chart below shows technology’s forward P/E compared to the forward P/E of the S&P 500. Now both forward P/Es are about the same. This is even while the technology sector’s earnings are growing faster than the market. This compares to the outrageous valuations of the early 2000s where the sector had an over 40 forward P/E. The companies are much more stable now. A great example of the sobriety of the current market is the beating Snap stock has taken. The company is seeing slowing user growth and no signs of profitability. As a result, it is getting hammered. In the early 2000s, companies were given a free pass much like some of the latest ICOs are getting.

Companies in the early 2000s and the current ICOs didn’t have a solid business plan yet were/are being bid up to enormous levels. Even Netflix (NFLX), while it has a high multiple and negative free cash flow, is much different from the tech stars in the tech bubble. Netflix has over 100 million subscribers. Companies like Pets.com and other failures never came close to that success level. You can argue that Netflix is still overvalued, which is fine, but I am comparing apples to apples by looking at the expensive Pets.com because Netflix is considered to be the face of the expensive valuations in tech as it is the “N” in FANG. The other obvious firm is Tesla (TSLA). I can’t defend Tesla’s business model or valuation in any way, but I think Tesla is an example of a cult stock because of the prowess of Elon Musk instead of a representation of the whole market. For example, Chipotle (CMG) was a hot stock which had a huge blow-up amid this strong bull market and the market didn’t miss a beat. The fact that crashes like Valeant (VRX), Chipotle, and the entire biotech sector can occur shows that there isn’t froth in the market.