Are We in a Tech Bubble Now?
To all the investors worrying about a tech bubble 2017, let me put your mind at ease. The answer is simple: no, we won’t see a tech bubble burst in 2017.
Silicon Valley has grown up. There is no great crash on the horizon.
There are pockets of the tech sector that need deflating, to be sure, either because technologies were over-hyped or because the situation has changed. These minor bubbles can still hurt you.
But let’s not overreact. These tiny pitfalls aren’t remotely similar to the dotcom bubble burst of 2000. The amount of wealth that the dotcom crisis destroyed was horrible. The Internet was in its infancy when silver-tongued salesman started pushing worthless tech stocks.
No one knew what the next stage of the Internet looked like. Yet those salesmen pushed and pushed. The more that people bought into their garbage, the higher the stock prices went, until one day the market collapsed from the weight of unfulfilled promises.
History will remember that crisis. In fact, I think many investors above the age of 40 are still shaken by the losses they sustained in that crash. Heck, the 2000 crash would be the Mother of All Crashes if the 2008 financial crisis didn’t appear eight years later to steal its crown.
But it’s time to get over ourselves. The boom is real this time.
Half of all publicly traded technology stocks are valued at less than 30-times earnings. That’s nothing compared to the dotcom era! Tech stocks were trading at sky-high price-to-earnings (P/E) ratios in the late 1990s, which is how we ended up in a mess. That is no longer true.
Just look at the NASDAQ Composite Index. It took a long time to break past the old dotcom highs, because this time the underlying valuations are reasonable.
As you can see in the below chart, the NASDAQ is accelerating. Some think this means we’re headed for a Silicon Valley tech bubble 2017 but, to be honest, they don’t know what they’re talking about.
Chart courtesy of StockCharts.com
Public and private funding for tech companies is much lower than it was in 2000. We may see more headlines about tech companies these days, but that’s only because many are successful.
Facebook Inc (NASDAQ:FB), Alphabet Inc (NASDAQ:GOOG), Amazon.com, Inc. (NASDAQ:AMZN); these companies rose from the ashes of the last crash. Now they are among the most valuable companies on Earth. Obviously, they’ll capture some headlines.
The bottom line is that Silicon Valley grew up. It matured in the 17 years since the dotcom crisis, and has embraced the important role set out for it. Dear reader, I firmly believe that the NASDAQ is on track to hit 10,000 before the end of 2018. So don’t miss out on this opportunity.
Afraid of How Tech Bubble Burst Will Impact You?
As I said before, a tech tech bubble 2017 burst is unlikely. Anyone who wants you to panic and put your money under the mattress is either a fool or a salesman. But that doesn’t mean every part of the tech sector is perfectly valued. Some markets are overpriced.
For instance, artificial intelligence (AI) looks like a small bubble. We haven’t seen evidence that AI is disrupting business in a big way. Yet every other company is pouring money into AI technology.
The hype is a little excessive, but it’s not that dangerous.
It’s common to see small bubbles form, not across the entire tech sector, but across emerging technologies. Eventually the bubble deflates because expectations are too high. Some founders and venture capitalists take a hit, but not for long.
The smart ones double down as a “sharks and minnows” game ensues. The sharks in this scenario are large tech corporations with enough cash to scoop up the failing AI startups (minnows). They have the smarts to absorb new technology and put it to good use.
Either that or an ambitious new startup will find an application for it. The point is that market forces will redirect that technology in productive ways. All we need to do is wait for that process to shake out. It isn’t a giant “house of cards” or anything nefarious like that.
The best idea is to ride out the storm.
Okay, But When Will the Tech Bubble Burst?
Seriously, there is no tech bubble, and there will be no tech bubble burst 2017. At least, not the kind you’re thinking about.
The days of the dotcom bubble burst are long gone. You can wait another 20 years to regain trust in the system, but history suggests you’ll miss out on a lot of money.
The NASDAQ 100 crushed the S&P 500 Index and the Dow Jones Industrial Average (DJIA) over the last 15 years. It wasn’t even close. Tech stocks are disproportionately represented in the NASDAQ, so it’s effectively validation for my belief in tech stocks.
Chart courtesy of StockCharts.com
Ever since the dotcom crash, the tech industry was forced to take a long, hard look in the mirror. In fact, you could say that the Silicon Valley tech bubble was the equivalent of puberty.
Tech stocks passed through that awkward phase. They made it to adulthood and, now the risks they take are more reasonable. Barring the occasional late-night bender, we’re looking at a new-and-improved roster of tech stocks.
The Truth about Silicon Valley
I understand the need for caution. So many technology companies paint themselves as crusaders, as brave revolutionaries willing to shake up “the system.” But, when you ask them what exactly they’re fighting against, the answers are usually paper-thin.
Why does that matter?! Don’t you see we are changing the world?!
“Thou doth protest too much,” my friends. The unsexy truth is that Silicon Valley is like anywhere else. People are trying to make money. But here’s the difference: there are a lot of high-powered brains in the area, not to mention a sophisticated network of financing good ideas.
Moreover, non-compete clauses are rarely enforced in California. This means that someone working at Apple Inc. (NASDAQ:AAPL) can leave and launch a competitor.
While this seems like a poor trade-off for Apple, it actually works in the long run. Don’t forget that Apple can poach talent as well. Great ideas spread across Silicon Valley like a virus, and I mean that in the best way possible. It makes the valley such a vibrant place for innovation.
So forget the heroics of “saving the world.” Silicon Valley is just an incubator for ideas that everyone else is too conservative to consider. There are no moral brownie points for being outrageous, but it does help capture the tail-ends of normally distributed returns.
If that last sentence was Greek to you, don’t worry. It’s just a fancy way of saying “No risk, no reward.” Silicon Valley is where that motto comes to life. Investors take risks there, and eventually one or two of those risks pay off in a big way.
So don’t worry so much. This tech boom is materially different from the rest.
Whenever I get tired of arguing with tech stock bears, I simply direct them to a presentation from legendary venture capital (VC) firm Andreessen Horowitz. The slideshow is almost two years old, but it highlights some important trends that still hold true today.
There’s also the fact that the Andreessen Horowitz team members are phenomenal investors. They got in early on Skype Global SARL, Facebook, Oculus VR, Buzzfeed, and Instagram, among many others.
Andreessen Horowitz makes some devastating points, such as:
- Earnings are growing faster than P/E ratios. That’s different from 2000.
- This time, there really are a ton of potential customers on the Internet.
- People are spending way more money online.
- Advertisers are willing to pay for online views.
- There’s less funding going into tech, but way more output.
If you are a data-oriented person, I suggest you seek out that presentation. Both founders of Andreessen Horowitz were big shots in Silicon Valley during the original tech bubble. They saw what went wrong. Years later, they formed this venture capital fund.
By investing in startups, Andreessen Horowitz has skin in the game. The firm’s money is literally on the line, so you can be reasonably assured that they mean what they say. So listen to them, listen to me, it doesn’t matter. The important part is to trust the data when you’re investing.
And the data says that a tech bubble 2017 burst is unlikely.