I remember it like yesterday:
I was in the 54th floor conference room of 500 5th Avenue, a sturdy skyscraper just across the street from the New York Public Library.
It was a cloudy day in September, and I was gazing out the window towards the southern tip of Manhattan.
Only two weeks earlier, I would have been looking at the World Trade Center...
Today, all I could see was smoke billowing toward the sky.
It was my first day working at a brokerage firm, and my new boss was about to host our firm’s weekly “idea” meeting.
He began by asking everyone which stocks and sectors they liked.
As it was my first day, he didn’t ask my opinion – but since I’d been working in the tech sector for the past six years, I figured I’d mention a few tech ideas.
My boss frowned at me, then pointed towards where the Twin Towers once stood:
“You see that, kid?” he said. “That’s what the NASDAQ looks like right now. The bubble’s popped. We are NOT recommending tech stocks anymore.”
Was I humiliated?
You’re damn right I was. It was horrible.
But I was also curious...
What, exactly, made the preceding years a “bubble”?
And if you were smack in the middle of it, how could you tell if it wasn’t a bubble, but a “boom” – in other words, a sustainable uptrend?
It took me years to answer those questions.
Today, I’d like to share my findings with you...
And show you why today’s technology market is most certainly not a bubble.
The Dot-Com “Bubble”
If you look back at the peak of the dot-com era, you’ll discover a massive surge in technology-related financings and IPOs.
In 1999 and 2000 alone there were 632 tech IPOs.
This past year, we’ve had 192 IPOs in TOTAL… and only 46 technology IPOs.
At the height of the dot-com bubble, those 632 technology companies raised a total of $62 billion when they went public.
The closest we’ve come since occurred in 2012, when tech IPOs raised $21 billion – and Facebook accounted for a whopping 75% of that figure.
Based on this data alone, you might be tempted to conclude that we couldn’t possibly be in a tech bubble...
But I’d argue that we still need more information.
What’s a “Bubble?”
A bubble is more than a string of IPOs, or a dramatic increase in stock prices.
Just because we had hundreds of IPOs in 2000 and the NASDAQ hit 5,000 – that didn’t make it a bubble.
You see, a bubble is when there’s a massive discrepancy between the price of a stock and its value.
Basically, during the dot-com bubble, companies went public at prices that far exceeded their true business value.
That’s not what’s happening today...
Revenue-to-Expense Ratio
To explain, let’s take a look at this graph compiled by the folks at Mattermark:
It shows the key difference between the companies that went public in the late 90s, and companies that are going public today.
Companies going public today are either profitable, or close to it...
Companies in the late 90s, in contrast, were operating at massive losses – but despite those losses, they still earned enormous valuations.
In the graph, you can see this phenomenon in the ratio of revenue to expenses:
In 2000, this ratio dipped to about 50% – meaning, for every $1 of expenses, the companies only had 50 cents of revenue.
Massive valuations without the revenue to back them up?
That’s a clear sign of a bubble.
Today, the ratio is closer to 90%.
That’s a boom.
Tech Boom
What we’re seeing today in tech is far different than what we saw in the late 90s.
This time around, the increase in stock prices is backed up by real revenue, real profits, and real growth.
So the next time you hear someone say we’re in a “tech bubble,” go ahead and share what you now know:
This time, we’re in a “tech boom!"
Happy investing.
Best Regards,
Founder
Crowdability.com
