As of late, I’ve been reading heading after headline comparing the 2022 tech sell-off to the dot com crash of the early 2000’s. I feel the need to point out that the media’s job is not to help make their readers wealthy, but to garner clicks on their articles, which often provide little to no financial advice. Unfortunately “Next Tech Collapse!! Should you be selling?” results in a lot more clicks than “ Why you should open a TFSA and invest in a balanced portfolio”.

Clearly, there is a disconnect and therefore I am writing today to point out the major differences between the selloff of 2022, versus the collapse 22 years ago. My hope is that after reading this post the next time you see a Bloomberg article titled “Big Tech’s floor collapses…” (headline on their June 13^th publication)  you will chuckle to yourself and keep scrolling. 

For those of you like me who grew up with the wonders of the internet, you may not remember the dot com bubble so allow me to give some context. The dot com bubble or tech boom occurred between 1995-2001 when technology companies began to receive tremendous amounts of attention from individual and professional investors alike. The growth of the internet, in combination with the exorbitant amounts of money thrown at this new industry resulted in the overvaluation of many companies in the tech sector, most of whom had little to no profitability and in some cases, nothing to offer besides a well-spoken CEO with an idea.

The cause of the collapse was three-fold. First, the Federal Reserve doubled borrowing rates from 1995 – 2000 to combat “irrational exuberance”.  Second, the yield curve inverted in 1998, and the U.S. fell into a recession, which was worsened by the Sept 11 attacks in 2001. Third, Y2K companies’ IT budgets went through the roof, which had the effect of pulling forward demand (I am told there was a legitimate concern computers would stop working when the clocks struck midnight on December 31,1999). As a result the Nasdaq fell 78% from March 2000 - October 2002.

I don’t blame people for drawing this comparison. 2022 has not been a smooth ride for the technology space to say the least. At the time of writing this post, The Giants- Apple, Microsoft, Google, Meta and Netflix have collectively lost over a trillion in market value this year (Source: New York Times). We’ve also witnessed a substantial amount of layoffs from companies like Robinhood, Shopify and Peloton which has only added further skepticism to the growth prospects of these firms.  

But there are three major differences between what we are seeing now and what happened in 2000 that should give investors some peace of mind.

1. Technology firms have legitimate products and services now

The reason so many companies filed for bankruptcy in the early 2000’s wasn’t that people stopped using their products. It was that many companies didn’t have legitimate products to begin with. Firms were receiving funding based on ideas that hadn’t been tested in the marketplace. Most dot-com companies were operating on the “get big fast” motto which required large operating losses and massive advertising budgets. This business model assumed that the firm could outlast their competitors and eventually make profits once they secured a large enough market share. Today, the big tech firms offer a suite of legitimate products and services which are integrated beautifully and work as a well-oiled money-making machine.  For example, Alphabet Inc. (Google's parent company) offers a variety of software and Internet-related services including: web browsing, cloud computing, streaming, mobile operating systems, and more. Alphabet then leverages these to generate a substantial portion of its revenue from advertising using their Google Ads program. In summary, the firms who made it out of the bubble aren’t here by accident and are offering products that we will continue to rely on daily.

2. We’ve been to this dance before

In the late 1900’s the internet was a technology that very few people actually understood. What we knew was that the technology would change the world, but only a few forward thinkers (Gates, Bezos, Jobs) had a vision of where it would take us. At this point in time the market had no concept of how to price these companies that were threatening to change the way business had been done for the last century. In 2022, we are able to use strong fundamental analysis to evaluate a tech companies valuation given their internal capabilities. 

3. The giants aren’t going anywhere

In the past, companies were simply spending their way to higher valuations. More ads resulted in more clicks, more clicks resulted in more potential users which tech companies would boast to venture capital firms to acquire more funding. In stark contrast to this, the tech companies we own in our model portfolios are here for the long run. In 2021 Google generated revenue of 209.49 Billion USD, which is larger than the entire GDP of New Zealand. (Source: worldometer). Apple has more cash on hand than the US Treasury (Source: business insider)! And Microsoft has control of nearly half (47.5%) of the office software market (Source:statista). Technology is no longer discretionary, it is required.  Tech budgets used to get slashed in the ‘90s and early ‘00s when the economy weakened but now spending actually rises as IT helps efficiency and lowers operating costs (source: vital knowledge.net). Now more than ever, the tech giants are offering high value products and services and doing so at extremely high profit margins.   

 

Final Thoughts

The media’s job is to sell papers, and it turns out writing fundamentally sound investment advice doesn’t sell. Our job is to help you navigate through the markets, on both the up and downside. The technology sector is a volatile space and as a result isn’t suitable for all investors. But for those able to hold on during the ups and downs, it can play a vital role in any growth oriented portfolio and shouldn’t be abandoned due to fear-mongering headlines.