Is There a Tech Bubble?
Sheila Jamison and Rich Jamison
With the tech sector’s strong 2017 performance to date (up just over twice as much as the S&P 500 index), people have asked us if technology is in a bubble. Is it like the 2000 tech bubble (often referred to as the “dot com” bubble) just before that one burst in March 2000? Our opinion is, no … because technology today is not in the March 2000 condition.
First, please recognize that investor newsletters and media pundits are the prime movers behind people asking this question. It is our opinion that neither newsletters nor media pundits are nearly as interested in getting an analysis correct as they are in additional paid subscriptions and advertisers. That said, even a blind squirrel finds a nut now and then … so let’s examine the current technology sector.
The best summation we’ve heard is, “Not your father’s tech.”
The technology sector's recent volatility instigated the widely touted “dot com bubble” comparisons. However, the technology sector today is on a far more solid base than it was 17 years ago.
- The first point is that the sector has matured. Companies have actual revenues. Many companies in March 2000 had none. In fact, the phrasing used that best expressed that was “Garbage.com” could run an IPO.
- Better than just revenues, most tech-sector companies have profits. Still better, profitability has been increasing. Many companies even pay dividends … and some have been increasing their dividends over time.
- Today the sector offers a 1.4% dividend yield, or about 10 times more than it did in 1999. That represents a 14+ percent annual growth rate, indicative of strong financial positions within the sector. The sector’s dividend growth is more impressive when compared to the S&P 500's annual dividend growth, i.e., less than 7 percent. Coupling the sector’s strong financial position with the pace of innovation suggests continued revenue, earnings and dividend growth.
- Technology comprises 22% of the S&P 500's total market value. It was 35% in March 2000 (the peak of the tech bubble). Yet, at the tech bubble peak, tech made up only 28% of the S&P’s earnings. It is 38% today.
- Tech trades at 20.2 times trailing 12-month earnings today. The S&P is at 19.5 times. The slight edge in tech appears to be related to the earnings growth potential it offers. Even ignoring that, the tech sector is trading nearly at the same multiple as the overall market (using the S&P as our benchmark).
- Remember what comprised the 2000 technology sector. It was mostly (i.e., ~70%) a cyclical, hardware-focused sector – goods that are very dependent on the overall economy. Today, software and services make up 60% of the sector. These items are often part of the daily operations of companies. That is, because companies use software and services on a daily basis, they are less cyclical. They usually fly below the capital expenditure radar.
Our belief is the technology sector sits is a deserved position. The recent volatility (that led to the media’s dot com bubble comparisons) appears to be attributable to investors taking some of the profits they made in the sector. They put money to work in other (underperforming) sectors, perhaps searching for new opportunities.
All sectors are subject to pullbacks. Said differently, a pullback in tech would be a “normal” (meaning typical or usual) market event. However, today’s tech cannot be justifiably considered similar to tech as it was in March 2000. Performance is dramatically different. Today’s tech is built upon proven business models, and has sales, profits and healthy balance sheets. For approximately the overall market valuation, it provides the highest earnings and dividend growth rates in the S&P 500. We see the sector’s long-term prospects as attractive.
Nothing in the above is meant to be, nor should it be construed as, investment advice or recommendations to buy or sell any security. Individual securities, whenever mentioned, are for illustrative purposes only and may not be relied upon as investment advice.
All indices are unmanaged and are not illustrative of any particular investment. A direct investment cannot be made in any index.
Tax and/or legal information contained herein is general in nature and for informational purposes only. It should not be relied upon as advice. Consult your tax professional or attorney regarding your unique situation.
Past performance is no guarantee of future results.