Sunday, September 24, 2017

Are We Heading For Another Dot Com Bust?

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.^IXIC/ (accessed 23 Sep 2017)

2 – Statista. Smartphone user penetration as percentage of total global population from 2014 to 2020. (accessed 23 Sep 2017)

3 – Internet World Stats. Internet Growth Statistics. (accessed 23 Sep 2017)

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