A wise man once wrote — Bill Valentine in last Sunday’s paper — that we may be having a deja vu moment, possibly experiencing a tech bust similar to the 2000 dot-com fiasco. When Valentine speaks, take heed. But before you start readjusting your portfolio, this tech guy believes this time may be fundamentally different.
Dot -com redux
When the World Wide Web became accessible to the general public in 1993, thanks largely to the Mosaic web browser, this was the tipping point that spawned the Information Age. People suddenly realized the potential of selling things to others without a brick-and-mortar store. This felt like a gold rush to many in tech, which happens with each new wave of technology innovation. Thousands rush in to capitalize, and a few survive to maturity.
The dot-com bust was mainly driven by two large sectors of tech, e-commerce (i.e. selling online) and telecom (communications and internet infrastructure). Sure, other sectors of tech were exploding beyond reason, such as the huge number of search engines, but these two verticals drove the massive devastation in valuation to tech stocks.
What may be surprising is that 48% of tech companies spawned during the dot-com era survived the downturn, some turning into the mega-techs of today such as Amazon, Google and Ebay. Turns out what doesn’t kill you does make you stronger.
In the year 2000, tech created a new consumer-based market, online sales. Many jumped into the market, most using antiquated ideas about supply chain and logistics. In other words, they focused on sales without reimagining and reinventing production and fulfillment. The goal was “eyeballs”: get as many people brand-aware and drive traffic to their websites. Sales conversion and profitability were farther down the stack of priorities.
What’s different today?
In short, everything is tech now. Supply chains, production, distribution, sales, customer support, competitive intelligence, cost optimization, HR, marketing, brick -and -mortar point-of-sale, facilities management and maintenance, etc., etc. are all driven by tech and tech-solution providers.
Today’s user behavior has acclimated to an all-digital, total online experience. Large -ticket items such as homes and cars are sold online, disrupting man-in-the-middle realtors and dealerships. Groceries are ordered online and delivered to your door. Our cell phones are our portal to just about everything. We expect a yoga studio to have up-to-date class schedules online and to USE THE WEB to book appointments with our doctors and chiropractors.
Seasoned investors are savvy: They have experienced tech cycles and demand more accountability and oversight. Although many are still growth-focused, companies can no longer hang over their skis. EBITDA matters, although break-even may be the goal during launch and growth phases.
The mega-techs are diversified. Amazon.com’s online business gets most of the visibility, but its Amazon Web Services company drives most of the profit. Other Amazon companies drive product and content, such as Amazon Prime video, Audible, IMDb, Alexa-enabled products, Amazon Fire TV, Whole Foods, Amazon Music and many others. Amazon’s Blue Origin space company is aiming for the lucrative satellite launch business along with ferrying astronauts to the International Space Station and future bases on the moon and Mars.
Yes, profits matter
To Valentine’s observations, the dot-com era was focused on growth at the expense of profit and investors were more than willing to fuel this delusion. Today, mega-techs such as Amazon, Google, Facebook, Tesla, Microsoft and Ebay are profitable. In late July, Tesla’s four quarters of profitability and stock valuation landed it a coveted seat on the S&P 500 list.
Venture capitalists and private equity investors expect a faster crossover to profitability from their startup investments and burn-rate is watched closely.
Tech is horizontal and vertical — it’s everywhere
Every household, business, service, government entity depends heavily on tech. Valentine’s caution is valid and follow the counsel of such savvy investment professionals. Just do not consider all sectors of tech as vulnerable to a tech bust as e-commerce and telecom were in 2000. The effects of the COVID-19 pandemic on our society has shown which sectors might be weak enough to crash. What surprised many pundits was e-commerce grew dramatically this time, along with communication stocks such as Zoom. These were the two tech markets that drove the dot-com crash.
If there is a broad tech crash, then the entire economy is at risk. We are nearly 100% dependent on tech vendors supporting every aspect of our economy, both private and public.
New habits, new winners
A psychotherapist once told me it takes 90 days to create or break a habit. The pandemic has lasted over 90 days, and it appears we have created a few, such as everyone and their great-grandmothers using Zoom. We also possibly broke a few, like shopping at brick-and-mortar malls and outlets, going to movie theaters and joining large crowds at concerts and football games. Zoom stock went through the roof, while you can imagine which direction AMC and Live Nation’s TicketMaster values pointed. Walmart and Target saw their online business soar while in-store sales dropped. People discovered how convenient Instacart, Grubhub and Uber Eats were while just about every major restaurant chain is on the ropes.
Tech is everywhere now. It is as pervasive and needed as food, power and water. A broad tech investment strategy should provide the best of both worlds: the chance to buy stocks like Amazon or Tesla when they traded at their lows and to have one tech sector climb providing cover for other ones that fall.
Many businesses are spending money to save money, using technology to improve infrastructure and optimize their entire operation in preparation for the eventual upturn using AI and robotics and updating existing technologies to scale better, faster and cheaper. These companies have the potential to be the next Amazons and Googles. I plan on holding my shares in Amazon, Tesla, Apple, Shopify and others. Cross all appendages — let’s hope they’ll weather the storm. But Valentine, don’t worry, tech stocks are not 100% of my portfolio. I’m not that crazy.
Preston Callicott is the CEO of Five Talent Software and is a self-described tech humanist who wants to embed the best of human traits in AI systems and robotics … before they rule the world. His wife, Chelsea, and twins remind him how great life is and that work isn’t everything.