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Nasdaq traders:
The tech crash was severe, but nothing like the bursting of the dot-com bubble
Photo: Michael M. Santiago/Getty Images
Lots of cheap money from central banks, which drove stock prices up, then a turnaround in interest rates, and the bubble bursts - at first glance there are many similarities between the dot-com crash 20 years ago and the sell-off that has been going on for months the US technology exchange Nasdaq.
But a closer look reveals the differences.
The long-term chart of price developments can initially inspire fear: Compared to the price increase that tech stocks had up to the Nasdaq record in November 2021, the hype around the turn of the millennium seems almost cute.
However, a look at the course developments in absolute numbers is deceptive - in percentage terms, the dynamics of both increases are comparable.
This is also made clear by the comparison of the valuation indicators.
Observers agree that the boom in tech stocks up to the end of 2021 was accompanied by a significant overvaluation of many stocks.
Investors took advantage of the low interest rates and pumped a lot of cheap money into promising growth companies, especially in the IT sector.
The key figure from which the valuation of such companies can be easily read is the price-earnings ratio, or P/E for short.
P/E then and now varied
A comparison of the P/E ratios on the Nasdaq 20 years ago and today makes the similarity of the developments clear: Then as now, valuations shot up, speculative bubbles emerged as if from a textbook.
However, similarity is not equality: In fact, investors in the days of the dot-com bubble, when the euphoria about the invention of the Internet replaced reason among many investors, apparently exaggerated much more than recently: the P/E ratio on the Nasdaq shot up significantly more at the time higher than this time.
This clearly shows what is probably the biggest difference between the Internet hype around the turn of the millennium and the most recent tech boom.
Two decades ago, countless IT start-ups dominated the scene, luring investors with fantastic promises.
On closer inspection, however, these companies did not have a working business model, let alone that they were profitable or even promised profits.
Apple, Amazon or Microsoft – still safe bets?
And today?
The course hype on the Nasdaq in recent years was complex.
On the one hand there were tech stocks such as the video conference provider Zoom, the Internet fitness company Peloton or the streaming service Netflix, which were considered winners of the Corona crisis.
Their share prices shot up as the pandemic spread because their businesses also picked up speed.
In the meantime, however, Covid-19 is largely a thing of the past on the stock exchange - and the share prices of Netflix, Zoom and similar pandemic papers are sometimes listed below the level they were at before the crisis.
However, unlike in the past, the tech hype of the recent past was mainly supported by large IT companies with a healthy business model, stable cash flow and regular profits.
We are talking about big players like Apple, Amazon or Microsoft.
Their price increases were primarily decisive for the run of the Nasdaq to the record in November 2021. Since then, these companies have also lost significantly in market value.
Some of their business results have recently also been rather meager.
But despite everything, the bottom line is that they still have billions in sales and profits.
Google parent Alphabet, online retailer Amazon, iPhone maker Apple, Facebook holding company Meta and software giant Microsoft all together generated total revenue of $359 billion and total profit of $69 billion in the most recent quarter, the British said "Economist" calculated.
These are numbers that were unthinkable on the tech stock market at the turn of the last millennium.
Additionally, these companies continue to have strong growth momentum, particularly in the cloud divisions of Alphabet, Amazon, and Microsoft.
It is important that the price-earnings ratio consists of two components: the share price, but also the company's profits.
The times when the share price was not in any reasonable relation to corporate profits - if there were any at all - are long gone for the big tech companies.
Today, many of them are still assessed as comparatively ambitious.
In view of the profitability, however, the bet often does not seem too daring.
An example is Amazon.
The trading group of multi-billionaire
Jeff Bezos
(58) was traded on the stock exchange less than ten years ago with P/E ratios of 900 and more.
Then Amazon was in the black for the first time – and the P/E ratio rushed down.
Today, the online group faces comparatively high share prices with billions in profits.
The P/E has therefore declined significantly compared to previous times.
Here's how tech stock valuations have evolved
expand areaThe iPhone manufacturer
AreaExpand the Google Holding
Expand areaThe electric car pioneer
Expand areaThe Facebook mother
Expand areaThe software giant
Expand areaThe streaming service
Expand areaThe video meeting specialist
SectionExpand the crypto platform
Expand areaThe Online Fitness Company
The situation is similar with other leading US tech companies such as Apple, Alphabet or Microsoft.
The shares of these big players were already the main drivers for the Nasdaq rise in the past hype.
According to experts, they could be there again in the future.
"Now that valuation levels have been adjusted and the sector's premium to the market is back in line with its longer-term history, there could be some opportunities for patient investors," says
Dirk-Jan Dirksen
, Tech Analyst at NN Investment Partners.
"Viable companies with better revenue visibility and healthy balance sheets, benefiting from long-term growth trends that are less affected by macroeconomic and geopolitical events, are likely to fare better as the market stabilizes."
Investors can find a few tech stocks Dirksen might be eyeing here.
