A very thematic trope you will hear in the news today, tomorrow and the next day is that Tech is in a massive bubble and going to explode soon. Let’s dissect this.
Back in the late 90’s, any company in the world who had the ability to IPO and had an accompanying website would explode to the upside. Famously, companies like Pets.com, with negative cash flows and on the verge of bankruptcy could compel a valuation of nearly $400M.
Nowadays, Chewy.com, what would be considered its replacement, clocks in at a massive $13B.
This has to be a bubble, right? Well yes, but no.
In the Chewy.com example, revenues have outpaced Pets.com by nearly 600 times over. The supply chain is stronger, the recurring customers is massive, and the value to customers is extremely high.
This is a consistent theme throughout the “Tech” space. In the past 20 years since the last dot-com implosion, there has been an overall quality increase in the value chain for these “Tech” driven companies. No longer are consumers hindered by 56k dial-up modems, 2 week delivery times, shipping costs that represent 10% of the total cost of purchase. In a word, we have become streamlined. Therein lies the value.
Another thing I want to talk about is what is considered a “Tech” company. To many, there is an aggregation of what is considered “Tech” and what is just considered a “Modern” company. Yes, the FAANGs are Tech, they are fully focused on online driven revenues. Apple is obvious, Netflix, Google, Facebook, yes. But we also consider Amazon “Tech” which opens up a new conversation.
Amazon battles it out with hundreds of companies across all spectrums, and does it so effectively through this streamlined process. Battles in the cloud space (AWS), all the way down to battles in the food space (Whole Foods). So are we now calling the food space a tech competitor?
A lot of what we are describing as “Tech” is really just “Modern”. Companies that have come around (for some, finally) to the digital revolution are now catching up to the full potential of their valuations.
And on to the third and final point. Yes, companies are getting bid up through the roof, but let’s be real- there is a good reason some of these companies are exploding in valuations. They are worth the hype. Markets are efficient. What you might see as a bubble is what the market decides is the appropriate valuation. Yes, Tesla is up 530% this year. That is mind boggling. But it is what it is- a defining company that may change the economic landscape for years to come. There aren’t enough r/wallstreetbets’ers to launch this company past Toyota. It is an institutional move.
It will behoove you to be aware that so called “bubbles” exist. It’s hard to say that a market with 4 Trillion dollar companies is fragile. If you have been watching closely, when the market turns risk-off, investors swarm to the FAANGs. They are now a “Safety” move. Try going one day without using one of the FAANGs. It’s nearly impossible.
So when you hear the word “Tech” reimagine this word to mean “Modern” and you’ll see why people are clamoring. These are companies to get excited about. When was the last time you got excited about The Dow 30? Did you jump for joy when a new Coke product came out? How about when Caterpillar came out with that shiny new earth mover? Come on people. There is value in those companies. But there are more exciting dollars to be made where the interests of the masses fall.
Ok last point. If you have missed this boom since March 23rd’s low, just remember. Stocks are never too high to buy or too low to sell. Keep your trailing losses tight at 10%. Make Jesse proud and keep your wits about you.