bull and bear

Shares in the biggest US techs have taken something of a knocking in recent days – is this the start of something more serious?

For those of you who were around in the late 1990s, the dotcom boom and crash must feel like a bad memory. Stocks surged, they surged some more, every man and his dog seemed to be talking about dotcoms. They used to say that if you took a ten dollar note, wrote dotcom on the back, you could then sell it for $100. And then it all went wrong – the tech dominated NASDAQ composite collapsed and to many it seemed like the whole thing was a con – techs were dismissed as no hopers – at least they were by many.

If you weren’t working back then, it may seem hard to believe – tech has changed business, the five biggest US companies by market cap are all techs – Apple, Alphabet/Google, Microsoft, Amazon and Facebook. Looking back in hindsight it is obvious that the late 90’s saw the creation of something quite spectacular. But, for a few years earlier this century, tech seemed to symbolise naive dreams.

And while the doubters were proven wrong, it always was hard to predict who the winners would be. Truth is, most techs set up during the dotcom boom failed. Apple and Amazon made it, Yahoo, or should we say YaWho? has had a more troubled time. Today, the Yahoo share price is half the peak price seen at the end of 1999.

Or take eBay – time was, people used to talk about it in the same breath that they talked about Amazon. Its share price is around 60 per cent down on its peak – set in 2004. It’s market cap is $35 billion – respectable for sure, but compare that with Amazon – share price is up nine-fold from the dotcom/noughties peak, market cap is now $446 billion.

But, the Amazon share price has fallen by around six per cent in the last few days. Shares in Apple, Alphabet, Microsoft and Facebook have all fallen by a similar amount – in fact their combined market cap has lost more than $10 billion.

So, is this the start of something more sinister?

Well, a booming market cannot last forever. Shares in all companies have been surging in recent weeks, some kind of correction was inevitable. All booming markets see the odd reversal, from time to time.

It may simply be that the tech valuations had got ahead of themselves, and needed to take a breather.

There is one key difference between tech stocks today and the late 1990s. During the dotcom boom, PE ratios – which compare market valuations of stocks with projected earnings – went crazy, close to 60, whereas the average PE ratio of the S&P 500 was around 26.

Today, PE ratios for techs and the S&P 500 in general are at similar levels – around 20. A PE ratio of 20 is still on the high side, but maybe for techs, it is not so excessive.

So, if anything, if you think that tech has greater growth potential than non-techs, right now they look to be priced attractively.

John Higgins, Chief Markets Economist at Capital Economics said: “Valuations of shares in the technology sector do not seem to be stretched relative to those in the broader market, based on a comparison of their price/estimated operating earnings ratios. This is quite different to the situation before the dotcom bubble burst, when the valuations of technology companies often appeared to have little to do with their ability to generate income.”