‘Dot.com Bubble’ vs. AI rally

With the recent surge in the Tech Sector due to exuberance surrounding AI, how can Investors compare this to the “Dot.Com Bubble” in 2000? It appears funds are flowing back into high multiple Tech growth stocks and away from defensive names. Technology stocks seem to rally on any news of a new AI initiative. But, despite today’s “Tech AI Rally” appearing extremely similar to the “Dot.com Bubble,” there are many important broader Tech Industry Indicators that are much different that point to a positive outlook for the sector going into FY 2024.

Before the “Dot.com Bubble” burst, the Internet IPO craze was launched with the Netscape Communications Corp. that went public in August 1995, the first user-friendly web browser that opened the World Wide Web to regular consumers. Sixteen months after it was founded, the company’s successful IPO helped ignite the internet gold rush, during which many businesses took advantage of what became a huge public obsession with the emerging technology. Many of these startups were bleeding RED and ended up failing — like Pets.com and eToys.com. But they were ahead of their time and helped set the stage for some of today’s still-extant tech stalwarts, like Amazon and eBay Inc. Amazon (going public in May 1997) and Netscape were “good-quality IPOs when they went public.” However, in the late ’90s it deteriorated to more speculative companies going public. This phenomenon also occurred after the COVID market bounce back. This time around, the risky trends in 2020 and 2021 were the special purpose acquisition companies (SPAC) that had blank checks with no profits and untested business models.

The “Dot.com Bubble” was characterized by the end of a massive spending boom to convert all software to be Year 2000 (Y2K) compliant and the tail end of a huge buildout by Corporate America to create an Internet presence. When IT spending started to dry up after 2000, followed by the 9/11 attacks the following year, it resulted in a massive devaluation of the Technology Sector.

Unlike in the Summer of 2000, today IT spending remains healthy. Global IT spending that is projected to grow by 5.5% in 2023 should drive the Technology Sector. Worldwide IT spending is projected to total $4.6 trillion in 2023, a 5.5% increase from 2022, according to the latest forecast by Gartner, Inc. Despite continued global economic turbulence, all regions worldwide are projected to have positive IT spending growth in 2023. The software segment will see double-digit growth this year as enterprises prioritize spending to capture competitive advantages through increased productivity, automation and other software-driven transformation initiatives. Conversely, the devices segment will decline nearly 5% in 2023, as consumers defer device purchases due to declining purchasing power and a lack of incentive to buy.

Today the S&P Information and Technology Index trades at a Median P/E of 35.3, compared to the peak during the Dot.com craze circa 2000, when the all-Tech Index traded as high as 62x Median P/E. Therefore, compared to YR2000, today’s Technology Sector does not appear to be as overvalued! This compares to the S&P 500 at 21.8x Median P/E. This represents a Tech multiple premium over the broader market of 1.68 times, which is not excessive!

Finally, in YR2000 many of the large mega-cap Technology stocks like Alphabet, Amazon, and Apple were not nearly as well capitalized as they are today. In YR2000, many Technology stocks were not profitable and had unproven business models. Amazon, for example, went public 1997 and did not get out of the “red” until posting a profit in FY2003, of just $35.3 million. In FY2021, Amazon posted a $33.3 billion profit! At the moment, not only are these bellwether Technology companies’ combined market cap larger than entire industry groups in the S&P 500 Index, but these names hold huge piles of cash on their balance sheets – Alphabet $169.2 billion, Amazon $96.0 billion, Apple $202.6 billion and Microsoft $132.4 billion. Many of these top Technology stocks could use their cash to weather any storm or make acquisitions to boost future growth.

In conclusion, even though it may feel like déjà vu all over again as the Technology Sector continues to recalibrate, it’s hard to believe that another “Dot.com Bubble” is going to burst and lead to a 70-80% share price devaluation.

Daniel Morgan Senior Trust Portfolio Manager