Are we in the Next Dot-Com Bubble?

The Nasdaq 100 Index is at a record high, with an insane 43.64% return over the year 2020.

What is the Nasdaq 100 Index?

It is a stock market index made up of 102 equity securities issued by 100 of the largest non-financial companies listed on the Nasdaq stock market. A large portion of the index covers the technology sector, which accounts for 54% of the index's weight, this leads me to commonly use the Nasdaq 100 as an indicator of the growth of the tech sector.

Disclaimer:

The content here is for informational purposes only and should NOT be taken as legal, business, tax, or investment advice. It does NOT constitute an offer or solicitation to purchase any investment or a recommendation to buy or sell a security. In fact, the content is not directed to any investor or potential investor and may not be used to evaluate or make any investment.

Do note that this is not financial advice. If you are in doubt as to the action you should take, please consult your stock broker or financial advisor.

Meanwhile, retail trading is booming: Retail investors have opened a huge number of accounts at online brokerages this year. I think Seedly themselves can attest to the huge growth in Investing Interest recently!

The priciest stocks -- mostly technology companies -- are also at a steep premium ever versus cheap shares, by certain measures. Tesla Inc. for example is trading at a 1635.75X PE ratio. To put this number into context, Toyota's P/E ratio is 15.4x.

How has COVID-19 impacted us?

The consensus is that the virus has fueled the dominance of massive tech companies. As people adapt to new modes of life, businesses that enable us to work, study, shop, and interact virtually have skyrocketed to mainstream adoption. However, a concern I have would be, that much of this growth has likely already been priced into the likes of Facebook Inc., Amazon.com Inc. and Apple Inc. It is now up to these big tech companies to seek the next breakthrough in order to sustain their revenue growth. For example, if Apple Inc. successfully releases in-demand products within the Electric Vehicle, VR/AR and Health industries, with seamless integration between these products and the existing Apple Ecosystem. This would then likely further propel Apple Inc. into further exponential growth.

However, this exponential growth in the tech sector is nothing like the old dot-com bubble.

At the peak of the dot-com bubble, the median age of a firm going public was five-years-old. The venture capitalists who backed these companies were aiming for supernova IPOs because that’s when they got paid. Any IPO meant an exit for venture investors. That incredible first-day “pops” that dot-com stocks experienced when IPOing? That was the early money cashing out, selling their shares to the investing public.

(Actually, you know what this sounds like? ahem $ABNB, it just feels like no one is concerned about the fact that it is actually in a consumer cyclical sector currently adversely affected by the pandemic)

The dot-com bubble was a fantasy period when a lot of VCs actually didn’t care_ _if a business turned a profit because it didn’t need to. But the time taken for a firm to go public has been double that for many of the past decades. That means the type of fledgling tech companies that imploded within the dot-com era now tend to remain private for extended periods, and therefore the ones that do go public are usually more mature, with lower debt to earnings ratio.

Back then, debt was also a much bigger burden. During the dot-com era, the Federal Reserve System was raising rates: three times in 1999 and then twice more in early 2000, the most sustained round of fiscal tightening over the whole of the late 1990s.

Now, borrowing costs are nearly zero and are likely to remain there for some time. The Federal Reserve expects to keep interest rates near zero through 2023 to support the nation's economic recovery from the coronavirus pandemic. Cheap money usually favors tech stocks, since it forces investors to hunt returns by chasing long-term growth.

Cheaper debt and fewer of it, healthy profits, and a virus-based boost to business. The tech-sector is here to remain, and therefore the difficulties of valuing a Tech company will still plague us, investors.

My conclusion? We are in no bubble.

However, if you are up for it - look towards mid-cap tech companies. This is likely where most of the growth for the next decade will come from.