Doc's note: Even if you're not an investor, you've probably heard of the dot-com bubble. In the late '90s, investors piled into dot-com stocks without any substantial fundamental data backing up valuations. By 2001, investors in those companies lost a lot of money.
But according to Joel Litman, founder and chief investment strategist at our corporate affiliate Altimetry, there's a lot that people misunderstand about the dot-com bubble. Today, he explains what you might not know about the bubble and where he sees it repeating...
The "dot-com bubble" is a catchy name... but it's a misnomer.
The term is commonly used for the 2000s economic hiccup. However, it doesn't accurately describe what happened.
You might remember early Internet companies like Pets.com. That business went public at $11 per share in 2000... before it even figured out how to make money. The company famously sold pet supplies online for less than it paid to get those supplies.
Less than a year later, Pets.com was bankrupt.
That's one of the most memorable stories. It's the kind of thing people typically think of when they hear about the dot-com bubble.
But in reality, a lot of the wealth created and destroyed between 1998 and 2002 had nothing to do with speculative dot-com companies.
Let me explain...
The true culprits of the 2000s economic slowdown were the much more viable, well-established telecom-equipment players.
Telecom companies boasted grossly overconfident valuations in the late 1990s and early 2000s. As more stuff moved online, companies that built the physical bones of Internet infrastructure soared.
Cisco Systems (CSCO) was a prime example of extreme market optimism...
At its peak in March 2000, Cisco's market cap reached $555 billion – a level it has never come close to since. Once the bubble burst, its stock fell more than 80%, wiping out hundreds of billions of dollars in value.
These companies drove the mania in the broad market, too...
Valuations got so crazy because of massive investment from telecom companies in the late 1990s. Some of this investment came as a result of Y2K... And some of it was because telecoms expected increased Internet demand and digitalization of businesses.
Said another way, valuations soared because growth was so strong. Stocks were rising like that growth would last forever.
Eventually, folks realized that this wave of investment had an expiration date. When that happened, valuations deflated.
Telecom businesses could no longer afford to grow at the same rate. Laying fiber optics and new communication grids is expensive. Without the necessary cash flows, these companies were forced to slow down. And the rest of the market followed.
We might be seeing the same scenario playing out today – with different players...
This time around, it isn't the telecom companies looking like the Monopoly man with their pockets turned inside out. It seems like the recent slowdown in venture-capital ("VC") spending is hurting tech earnings.
A slew of Big Tech companies including Amazon (AMZN), Google parent Alphabet (GOOGL), Intel (INTC), and Microsoft (MSFT) have been riding a wave of sustained demand to rising valuations for the past three years.
This demand was initially boosted by what we call the "at-home revolution." People were stuck at home during the pandemic and became more dependent on tech services than ever before.
But that was only a portion of what boosted earnings for Big Tech... The real driver for things like Amazon Web Services, Google Cloud, Microsoft Azure, and Intel's chips has been VC-funded companies with near-unlimited budgets for these projects.
These firms spent money freely to build scale. Profits weren't their main priority for the immediate future. But now, they can't afford the luxury of time.
With interest rates rising and funding rounds vanishing, these venture startups have to make tough decisions. If they don't become profitable soon, growing revenues will no longer be their only priority.
That's why they're now desperately rushing to cut costs. And without limitless VC budgets to fund growth, Big Tech is rapidly disappointing investors...
Plenty of folks think this is an opportunity to "buy the dip." But at Altimetry, we're a little more cautious.
From 2000 to 2002, Big Tech companies lagged the rest of the market as it recovered. These stocks stayed below their all-time highs for a long, long time following the so-called dot-com bubble.
We might be seeing the same thing today. Big Tech could be dead money for a while as valuations come back down to Earth.
Shares of some of the biggest names in the sector have plunged following disappointing earnings. And with interest rates continuing to climb, it doesn't look like they've found their bottom yet.
Of course, not every tech company will underperform. Specific businesses can still fare well in this environment.
But you might want to focus your money elsewhere for the time being... Big Tech stocks likely have plenty of room to fall from here.
Editor's note: According to Joel, if you want to protect your wealth, you should position yourself in the right sectors. In a recent presentation, Joel names the three sectors that his systems say will likely crash in 2023... and the three sectors that are best positioned to soar. Click here for all the details.