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Photo: Bloomberg
Photo: Bloomberg

Tech stocks boom: What the dot-com survivors think

The big fear of bears is that this remarkable stock rally is occurring during a pandemic which has spurred the worst economic slump since the Great Depression

LONDON : Plenty of folks on Wall Street can tell tales of the dot-com bubble. Not many of them launched a $150 million tech-focused asset management firm about three months before it burst.

Ryan Jacob had a sensational track record when he started the Jacob Internet Fund in December 1999 at the age of 30. He had ridden the boom, then he endured the crash and incredibly kept his firm alive to this day.

All of which makes him as qualified as anyone to judge the current tech rally.

“The only people who say, ‘Yes, it’s like the 1990s’ are hedge-fund managers who are net short and annoyed," Jacob said by phone from Los Angeles. “To say it’s like the late 1990s -- they have no idea."

For anyone without his experience, perhaps it’s forgivable.

Graphic: Bloomberg
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Graphic: Bloomberg

The Nasdaq 100 Index is at a record while retail trading is booming. The priciest stocks -- mostly technology companies -- are at the steepest premium ever versus cheap shares, by some measures. Tesla Inc. is trading at more than 800-times earnings while an electric-truck peer, which made just $36,000 last quarter by installing solar panels for its founder, is valued at $16 billion.

This may not be the dot-com bubble, as Jacob says. But that doesn’t necessarily mean it’s no bubble at all.

Adrenaline Stocks

Scott Barbee started the opposite kind of fund to Jacob in 1998. Barbee is a value investor, a group that’s arguably most likely to invoke the dot-com bubble when warning about the current state of markets.

“You have very high valuations on certain adrenaline-type stocks where fundamentals certainly look questionable," said Barbee, president and founder of Aegis Financial Corp. in McLean, Virginia.

The big fear of bears is that this remarkable stock rally is occurring during a pandemic which has spurred the worst economic slump since the Great Depression.

The consensus is that the virus has fueled the dominance of big tech companies, and Barbee doesn’t disagree -- his mother is among the new converts to online grocery shopping, after all. His worry is that much of this growth has already been priced into the likes of Facebook Inc., Amazon.com Inc. and Apple Inc.

Graphic: Bloomberg
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Graphic: Bloomberg

For Paul Quinsee, the key to understanding how companies like this can be worth in the region of $2 trillion -- a figure Apple topped this week -- is their profits.

The global head of equities at JPMorgan Asset Management has been with the firm since 1992, and recalls the dot-com era as a period when investors bet on hoped-for earnings, in contrast to the current environment.

“Today, at least for the big companies, the long-term profits have arrived," said New York-based Quinsee. “I would be surprised if there was a similarly spectacular decline. But the market’s leadership could change."

Size Matters

The market of 2020 is a very different place than it was two decades ago.

The number of domestic U.S. stocks has nearly halved from its 1998 peak to about 3,700 today, with much of the decline driven by disappearing micro-caps. In the nine years through 1998, there were 3,614 initial public offerings, compared to just 2,093 in the same period through 2019.

Graphic: Bloomberg
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Graphic: Bloomberg

At the height of the dot-com bubble, the median age of a firm going public was five years-old. It’s been double that for most of the past decade, according to data compiled by Jay Ritter at the University of Florida.

That suggests the kind of fledgling tech companies that imploded in the dot-com era now tend to stay private for longer, and the ones that do go public are usually more mature.

“The VCs could stay in longer and didn’t have to share any of the growth of the steepest part of the curve with the public," said Lise Buyer, who now advises tech firms on IPOs but was analyzing them at Credit Suisse First Boston during the dot-com boom. “Does it also mean companies are more stable? The answer is generally yes."

As the modern equivalent of dot-coms learned to stay private, growth stocks in the market began to look very different. The Russell 3000 Growth Index currently has a net debt to earnings ratio of just slightly above 1. It was about 2.3 at the end of 1999.

And back then, debt was a bigger burden. Around the time firms found themselves hurriedly removing “dot-com" from their names, the Federal Reserve was raising rates. Now, borrowing costs are nearly zero and look likely to stay there for a while.

Cheap money usually favors tech stocks, since it forces investors to seek returns by chasing long-term growth.

No Envy for Analysts

Cheaper debt and less of it, healthy profits, and a virus-based boost to business. But not everything is different about technology shares in 2020.

Predicting the outlook for companies when traditional valuation models do not necessarily apply was a huge challenge during the dot-com bubble, and remains so today. If anything, putting a price on intangible assets like research prowess has become more critical as firms splurge ever-greater sums on hard-to-quantify investments.

“All these interesting new companies, but again how do you value them?" Buyer said. She recalls getting hate mail for not being enthusiastic enough about shares in the bubble, and then getting sued for her lofty forecasts when everything collapsed.

“I don’t envy the sell-side analyst," she said.

Even Jacob, who currently oversees about $100 million, worries that many of the large-cap tech stocks have run their course. He has shifted more of his fund toward small- and mid-caps.

It has seen milder swings in recent years, which most would consider a good thing. But Jacob can’t help feeling his job has become just a little duller.

“As a public company investor in today’s environment, it’s a bit frustrating," he said. “You’re not going to replicate what happened in the late 1990s, it was basically the dawning of the Internet."


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