With the rise of tech companies and the
prominence of tech-related issues such as driverless cars and AI (artificial
intelligence), some veteran investors and traders may be wondering, “Are we
heading for another dot com bust?”
Well, the answer is somewhere out there and
only time can tell, but let us try to find one by going through some of the
trends and indicators that we can see now.
First, we shall go through a history
lesson.
The Original Dot Com Boom and Bust
The original dot com boom and bust period
was generally accepted to be between late 1998 and early 2001. Using the NASDAQ
Composite Index as a gauge, from a modest 1500-ish points in August 1998, it
reached to slightly above 5,000 points in March 2000, before falling down again
to about 1,800 points in March 20011. Back then, anything and
everything related to the internet were seen as a huge potential, and huge
amounts of money were invested in these companies, both private and publicly
listed. Exuberance ruled the days back then, when investors and traders were
convinced that certain companies would give them a big break.
The overall strategy adopted by these dot
com companies were to create brand awareness and capturing the market share.
This meant spending large amounts on marketing and providing freebies or huge
discounts to customers. It was planned that after a substantial market share
was captured, the companies would stabilise down to create a more profitable
structure. While money was spent, a very huge proportion of the companies did
not make any of it.
With all these factors in place, a bubble
was thus formed and we knew the rest of the story.
Any Difference Between Now and Then
Fast forward 16 years, we are still seeing
some of the signs that had happened back then. Some companies are still
adopting the brand awareness and market share capturing approaches with
freebies and discounts; The valuation of the listed tech companies, based on
Price to Earnings ratio (or P/E ratio), are relatively higher than their
non-tech counterparts, though not as outrageously high back in 2000. For the
unlisted companies still in the domain of private equity investments,
valuations were placed in the billions for the well-known ones.
So, with this similarity, are we seeing a
second dot com bubble forming?
Before we jump to that conclusion, there
are two main factors, in my opinion, that could spell a difference between then
and now.
The Smartphone Revolution
The first factor would be the entry of the
smartphone. Back in 1999 to 2001, there was no such thing as the iOS or the
Android OS, and smartphones were rare to begin with. Anything that was related
to the internet had to be accessed through a computer, and even though there
were laptops, which were more mobile, they were expensive devices to have.
Now things are different; in 2016, the
world smartphone penetration was about 28.3% and it is projected to rise to 37%
by 20202. Many business-to-consumer tech companies (and some
business-to-business ones) are utilising the smartphone as a way to reach out
to their customers, since it is cheaper and more convenient.
Internet Usage
The second factor hinged on the prevalence
of the internet in our lives. In year 2000, at the height of the dot com
bubble, only about 5% to 6% of the world population used the internet; By June
2017, that number jumped to 51.7%3. In fact, numerous surveys and
studies have shown that a lot of people could not live without the internet.
By Their Powers Combined…
The smartphone and the internet have
combined into one powerful platform for both businesses and consumers alike,
and they permeate deeply into our everyday lives and goings-on, ranging from
social media (e.g. Facebook, Instagram, Twitter, etc.) to shopping (e.g.
Amazon, eBay, Alibaba, etc.). Also, comparing to the early 2000s, the mature
industries and sectors now are feeling more threatened of being partially or
totally replaced.
So What Is The Answer To The Question
Back to the question of “Are we heading for
another dot com bust?”, after digesting some facts and figures, my answer would
be “I do not know”. Yes, it may sound as a bummer, but one thing is for sure
that a thorough fundamental analysis would probably save you from being hit
hard in a similar bubble.
If you wish to invest in tech companies or
their related sectors, do remember not to put all in one basket, and also the
12% limit rule along with it.
1 – Yahoo Finance. NASDAQ Composite. https://finance.yahoo.com/quote/^IXIC/
(accessed 23 Sep 2017)
2 – Statista. Smartphone user penetration
as percentage of total global population from 2014 to 2020. https://www.statista.com/statistics/203734/global-smartphone-penetration-per-capita-since-2005/
(accessed 23 Sep 2017)
3 – Internet World Stats. Internet Growth
Statistics. http://www.internetworldstats.com/emarketing.htm
(accessed 23 Sep 2017)