Are we in a tech bubble similar to the tech bubble of 2000? Lets look at the data!

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The Top MarketBites Investment Stories for September 25th, 2020

WHAT IS DRIVING MARKETS TODAY?

U.S. stock indexes held on to slight gains during a choppy session on Thursday but were still negative for the week. The tech-heavy NASDAQ outperformed other indexes which is a trend reversal, as much of September’s losses have been concentrated in mega-cap tech stocks. Expect markets to remain choppy leading up to the Presidential election.

TOP STORY 1: Are we in a tech bubble like the one in 2000? Based on the data, we are NOT. 
What is happening?
The recent surge in technology stocks invites comparisons with the late-1990s tech bubble, but beyond the bloated market-cap share, 2020’s market still stands in stark contrast to the days of irrational exuberance. Tech valuations are actually far below 2000 levels, and IPOs are not as nearly hot as back in the day. 
What is irrational exuberance?
Also known as FOMO or fear-of-missing-out. Irrational exuberance is stock market behavior that simply cannot be rationally explained. The 2000 Tech Bubble and the 2007 Housing Crisis both displayed irrational exuberance. People got greedy and continued to bid up stocks and real estate to unthinkable levels.

Tech stocks in 2020 vs. Tech stocks in 2000

  • Technology, media, and telecom (TMT) market cap as a share of the S&P 500 is comparable to the bubble of 2000. TMT is 39.9% of the index vs. 45% in 2000. The share gain has been more drawn out though. In the five years before the bubble in 2000, the group outperformed by 553% vs. 125% over the past five years (2015 – 2020).

  • The sector’s 5 biggest companies (Microsoft, Apple, Amazon, Facebook, and Alphabet) account for 22.2% of the S&P 500’s weighting vs. 11.7% for Microsoft, IBM, Intel, Nokia, and Cisco 20 years ago. Yet valuations aren’t at similar extremes. Today’s top 5 tech stocks trade at a 29.9% premium trailing P/E to the index vs. 51.1% in 2000 (and the valuation premium has been trending down since 2015).

  • From 1998 to 2000, there were 177 tech IPOs and the average price gain 3-months after the IPOs were 136%. In the last 2 years, there were only 50 IPOs, with an average price gain of only 32.9%.
The Takeaway:
Overall, tech multiples are far below levels reached in 2000 and have been deflating, while IPOs have been limited and met with much less enthusiasm. Are tech stocks expansive? Most likely yes! But are we in a bubble similar to 2000? No, we are nowhere close to that.

TOP STORY 2: Are you letting Amazon fly security cameras in your home?
What is happening?
Among many other things, Amazon announced two new Fire TV products and a flying Ring security device during its big online hardware event on Thursday. Amazon’s Fire TV gadgets compete directly with Roku and Apple TV, offering people access to popular apps such as Disney+, Netflix, Hulu and more.

Why does this matter?
Amazon focused on upgrading the FireTV product line, because of a surge in demand from people staying home. But more interestingly! Amazon noticed that its voice assistant, Alexa, has been receiving 80% more FireTV related questions recently. So Amazon used that information to give customers exactly what they wanted. This is a pretty stunning example of how much information Amazon collects on its customers and how they can leverage that to make people more dependent on their products.

Top new FireTV features: A redesigned home screen. Support for 6 user profiles that stay with you even within third-party apps like Netflix, Hulu, Disney+. Upgraded Alexa voice assistant. 

Amazon also launched an autonomous indoor security camera that will be available in 2021. Learn more about it here

The Takeaway:
Amazon continues to focus on becoming your go-to smart-home technology provider. The smart-home business has significant platform effects, meaning that it is in the customer’s best interest to use one platform. This can create very valuable and sticky client relationships over the long-run. Amazon is not the only smart-home technology provider. Google and Apple are two behemoths competing for the same homeowners with very similar product offerings. 


DEAL & IPO WATCH:

– Penn National Gaming is taking advantage of its nearly 300% surge this year, helped by its minority interest in Barstool Sports, to sell 14 million shares of its stock (or 11% of the company). Barstool Sportsbook betting app reached 21,000 downloads per day in its first weekend. Breaking all sports betting records!
– Deliveroo, the Amazon-backed food delivery company has begun preliminary talks to explore an IPO in 2021.
– E.W. Scripps agrees to buy ION Media for $2.65 Billion in Berkshire-backed deal


WHAT ELSE IS HAPPENING:
– Palantir expected to be valued at $22 billion in trading debut – (read here)
– TikTok – Oracle – Walmart deal in Beijing’s hands – (read here)
– Europeans want those big Americans SUVs? – (read here)
– House prepares new $2.4 trillion stimulus plan with unemployment aid, and direct payments  – (read here)

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