New York (CNN Business)The recent pullback in tech stocks followed a spectacular surge at the start of the year. That should have longtime market observers worried about the similarities between now and the height of the dot-com bubble in 2000.
For all those Millennial Robinhood traders who were just kids 20 years ago and are relative newbies to the market, the recent volatility should serve as a lesson. For all the times that people say that “this time is different” that’s usually a telltale sign that it actually isn’t.The rise of meme stocks like GameStop (GME), the flurry of initial public offerings and special purpose acquisition company mergers as well as the stunning runs in Tesla (TSLA) and bitcoin (XBT) are nothing more than another case of the forces of market speculation running amok.
Investors are buying companies with significant challenges and ignoring the weak fundamentals. GameStop isn’t the only “meme” stock out there. Movie theater chain AMC (AMC), clothing retailer Express (EXPR) and headphone maker Koss (KOSS) have been soaring.
Corporate America's earnings recession is overAnd all the talk about “stonks” and cryptocurrencies on Reddit and in TikTok videos isn’t really that much different than people chattering about how high they thought Qualcomm (QCOM) and Cisco (CSCO) were going to go in the late 1990s on Raging Bull and Yahoo Finance message boards.Read MoreThere are numerous other echoes to the tech craziness of the late 1990s.
Investors partying too much like 1999?
Blank check SPAC mergers may not have been popular more than twenty years ago. But there was another hot financial trend at that time that was also a sign of market froth — companies spinning off their online divisions or setting up so-called tracking stocks for them.Barnes and Noble, for example, trying to fight off competition from a still relatively new Amazon (AMZN), spun off its Barnesandnoble.com unit into a separately traded company in 1999. It was eventually folded back into the parent company.Tracking stocks were even more ridiculous than dot-com spinoffs. With a tracking stock, a company would sell shares of a business unit that merely tracked the performance of the division. But investors who owned the stock didn’t have the right to vote on company matters like investors in other public companies did.
Reddit names its first-ever CFO as it mulls IPODisney (DIS) used to have a tracking stock named Go.com for its online operations. NBC had an internet tracking stock as well. NBCi launched in 1999 — back when GE (GE) owned NBC. Comcast (CMCSA) is now the parent of NBC. CNN owner AT&T (T) had a tracking stock for its new (at the time) wireless unit in the early 2000s. So did Sprint (now owned by T-Mobile (TMUS)) for its PCS wireless division. None of these tracking stocks exist anymore.
IPO and SPAC bubble and concerns about pricey valuations
There were also plenty of unprofitable companies rushing to go public, despite having little in the way of revenue let alone profits. The spectacular collapse of Pets.com stock after its IPO in February 2000 — just before the Nasdaq peaked — is still the poster child of wretched market excess. The good news for investors today is that many of the big unicorns going public via IPOs, SPACs or directly listing their shares on exchanges are not Pets.com 2.0. Airbnb, Palantir, DoorDash and many other recent stock debuts are industry leaders. Still, the valuations for many of these stocks are certifiably insane considering that many of the companies are still not profitable — even though their revenues are substantial and growing rapidly.The prices for top tech stocks, even the FAANGs, Microsoft (MSFT) and Tesla that currently dominate the S&P 500, might be unjustifiably high as well.
Scaramucci finds 'great irony' in Republicans opposing Biden's rescue planAccording to data from FactSet, the S&P 500 is currently trading at more than 21 times earnings estimates for the next 12 months. That’s above the five-year average of just under 18 and the 10-year average of nearly 16. It’s also approaching the peak March 2000 levels of 24 times earnings estimates. In other words, the market is priced for perfection. That’s problematic. If (or when) the most bubbilicious stocks finally start to pull back, the sell-off can last a long time and the damage could be severe.
After all, when the Nasdaq first topped the 5,000 level in March 2000, it did so after surging past the 3,000 and 4,000 levels just a few months earlier. It was a mania. But once the dot-com bubble burst, the Nasdaq did not climb back above 5,000 again until March…2015. So last year’s brief bear market pullback following the beginning of the Covid-19 outbreak in March could be just a small taste of what’s to come for tech and momentum stocks.
Source: edition.cnn.com
