Dot.com 2.0?

Jeff D. Opdyke

I was an investments writer on The Wall Street Journal’s Money & Investing staff back in the throes of the dot-com bubble in 1999-2000. I well remember sell-side analysts, too smart by half, telling investors that the old rules of valuing stocks no longer applied. Who cares about sales and earnings when you have all those eyeballs on the internet every day? Who care about the fundamentals of running a business when you have such a great story to tell?

I remember a colleague writing a story about a barbershop in Massachusetts where customers were stopping by not so much for a haircut but for the tech-stock advice dispensed by investment newbies who’d convinced themselves the Street minted riskless rewards. Within days – literally days – the tech market imploded and Main Street investors lost billions of dollars in the wipeout.

Today, I sense a similar dynamic at play. And I sense a similar conclusion in the offing. Investors in a certain subset of stocks are setting themselves up for a swift, kick to the wallet. Billions are going to vanish.

The problem today, just as it was two decades ago, is that newbies are buying the story and casting aside the fundamentals. Is Nikola (NKLA), a company with zero sales, worth $13.5 billion, just because GM is investing some money into it? At some point, maybe. Now? Nope. The company hasn’t even filed its first quarterly earnings report, and it hasn’t proven it will be a viable business. It won’t start production until late-2022, at best, and management has yet to operate a fully functioning production line and work out all the inevitable kinks. From here to there is filled will all sorts of potential disasters.

Is Tesla worth 860x trailing earnings and 206x forward earnings? Not likely. It’s not like every other car maker in the world isn’t working on its own electric cars and trucks. Sure, Tesla will be a player, but will it be a player so far removed from Porsche, Mercedes, Audi, Toyota, Mazda, GM, Ford, (maybe even Nikola) that it deserves a multiple that implies it will take a couple centuries for the company to earn profits equal to the price investors are paying for the stock?

The dot-com collapse hints at that answer.

Like the dot-com bubble, Wall Street today has disconnected from reality as newbie investors try to replace lost, post-Covid income by throwing money at the Street as though Lower Manhattan is a casino in which shares of companies are colorful chips to be tossed onto the table for another spin of the wheel, another toss of the dice.

Alas, investing doesn’t work that way. You might get lucky for a while, sure. But, ultimately, the rules of the game never change. The story is never as important real operations and logical valuations.

So, be careful out there. The tech unraveling we’re seeing at the moment might just be a hiccup … or it might just be the vanguard of dot-com crash 2.0. If you have profits in companies such as Mimecast (MIME), Shopify (SHOP), Salesforce (CRM), Square (SQ), Pinterest (PINS), Netflix (NFLX), Tesla (TSLA), ServiceNow (NOW), Nikola (NKLA), Zoom Video (ZM), Advanced Micro Devices (AMD) and so many others trading at stretched – even extreme – valuations, take a lot of those profits off the table and be happy you were fortunate.

P/E & P/S ratios for companies discussed above

As the trite Wall Street axiom holds: Pigs get fat; hogs get slaughtered. And right now, the butcher just turned the lights on in the abattoir.


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