Fears of a new dotcom bubble are beginning to rise, as investors question whether this year’s technology run – the S&P Information Technology Index is up more than 20 percent year-to-date – is building toward the same over-saturated scenario as nearly two decades ago.
Yet Invesco’s John Frank believes the current tech run-up is not even close to reaching the excess seen during the dotcom bubble.
“We are still nowhere near the bubble status of 17 years ago,” wrote Frank, whose firm manages $859 billion. “Total valuations for the five largest technology firms that are 60 percent lower than they were 17 years ago.”
Frank based his analysis on the five largest, publicly traded stocks: Apple, Alphabet, Microsoft, Amazon and Facebook. Often those stocks are put into a group called ‘FANG’ (which includes Netflix), but Frank called his group the “Power Five.” In March of 2000, the “Power Five” of the dotcom bubble consisted of Microsoft, Cisco, Intel, Oracle and IBM.
To be sure, it’s not in Frank’s best interest to call these stocks a bubble. After all, his firm manages the PowerShares QQQ ETF, which contains the largest Nasdaq stocks, many of them tech-related.
Frank, whose role at QQQ is to develop strategies which promote the PowerShares ETFs, compared valuation snapshots for these two “Power Five” groups. The June 2017 group trades at an aggregate of 30 times trailing earnings, compared to the dotcom bubble’s 78 times trailing earnings. The current group would need to see the price of its stock double to even come close to the dotcom group, and even then would fall short.
Beyond a trailing earnings comparison, Frank said the valuations are even more different when comparing each period’s interest rates with its earnings yield, which is the opposite of an earnings multiple. During the dotcom era, the aggregate earnings yield was 5.1 percent lower than the 10-year Treasury bond’s yield, while this year the aggregate earnings yield is 1.1 percent higher than the 10-year. In essence, current investors are being compensated for the risk of holding technology stocks in a way that doctom investors were not.
The strong balance sheets of today’s “Power Five” is another difference, Frank said.
“Cash and marketable securities (most held abroad) make up 18.3 percent of the ‘Power Five’s’ aggregate market capitalization, compared with 2.3 percent for the largest companies during the tech bubble,” Frank said.
On a comparable basis, the current company with the lowest cash holdings – Amazon, with 4.5 percent – still ranks higher than Intel, which had the greatest amount of cash holdings at 4.1 percent.
The market still remains charged by technology companies, especially by the growth of these “Power Five.” Each of these companies is up 15 percent or more year-to-date, and with no signs of slowing down. In Frank’s view that’s a positive sign, and not a trip down memory lane.
This post was popular on the Harvest Exchange research sharing web site.