Are there tendencies to a Technology bubble?

In the decade from October 1990 until March 2000, Nasdaq Composite Index with its focus on technology companies increased by 1 444 per cent – or, approximately 34 per cent annually – measured in USD. The last part of this rise was particularly strong; in 1998 the index increased by 40 per cent and in 1999 by 86 per cent. The year 2000 kicked off strongly too, with an increase of 24 per cent prior to the index reaching the high in March of the same year, whereby it decreased by 78 per cent until October 2002. An investor that invested in the index on January 1st 1998, experienced firstly that the value of the investment tripled in value. However, by the end of 2002, she was left with a negative return.

Looking back, we know this period from 1998 to 2002 to be the rise and eventual collapse of the dot-com bubble. A myriad of companies went bankrupt when the bubble burst, and these bankruptcies were especially concentrated among companies within internet services. These were in other words companies that delivered their services on a www domain that ended with .com, from which the name dot-com derives. Among the most famous companies we recall names like Pets.com and Webvan.com, but also big communication companies like Worldcom (a company also known for accounting fraud), NorthPoint Communications and Global Crossing. In common, these two groups suffered from huge operational losses, but had an exaggerated belief in growth in the foreseeable future coupled with aggressive investments to fuel its growth ambitions.

At the peak of this euphoria, the Nasdaq Composite Index was traded at more than 200 times expected earnings.

We are in the eleventh year of growth in global equity markets since the financial crisis. The rise has been led forth by the technology sector. Many investors ask themselves, for this very reason, if we experience today a new dot-com bubble. Our view is that even though technology shares have performed strongly for many years, there are few parallels between the current market environment and the dot-com bubble environment.

If we look at the development of the Nasdaq Composite since the low point in March 2009, the index has grown by a little more than 20 per cent annually, compared to the annual 34 per cent increase until the peak of the dot-com period. In other words, value increase has not been similarly strong. More importantly, the index performance is supported by a steady profitable income growth for the sector. The companies are also immensely well capitalized throughout this period, and the technology sector has, for instance, net cash balances, whereas most of the other sectors have net debt. In addition, the companies have very solid and consistent cash flows. The five largest companies in the S&P500 Index, Amazon, Alphabet (Google), Apple, Facebook and Microsoft, account for 22 per cent of the index, but also generate 22 per cent of the cash flow.