Here’s Why We’re Not Facing Another Dot-Com Bubble

6 min readMar 8, 2021

A year ago, the WSJ proclaimed the market isn’t like the dot-com bubble. We disagreed. A year later, the WSJ proclaimed the opposite. Again, we find ourselves on the opposite side of the argument.

Simply put, this isn’t 2000.

It’s no surprise fears of a tech-fueled “bubble” are surfacing. We’ve been on one of the most epic bull runs in history, with the S&P rising about 70% since the March 2020 low. There’s no doubt some valuations supply cause for concern.

While the broader market trades at a relatively high 22x 2021 EPS estimates, many individual stocks indeed have exceedingly rich valuations based on near-term fundamentals. But, from our view, “tech” valuations are cheaper than they seem.

Coming out of the pandemic we’re at a period of maximum unknowns. Will life ever go back to the way it was? Which industries will never recover? Which companies will come to dominate the next generation?

The shift we are living and witnessing across tech and society is of seismic proportions. Not only is it important to recognize this isn’t 2000, but also to not be caught offside by investing like it is.

Rather than repeat, history rhymes. In other words, the similarities don’t eclipse the differences.

Dot-Com Era

For contrast, consider 2000. What were the set of expectations that served as the precursor for the dot-com bubble? In the 1990’s there was the meteoric rise in PC, a deregulation of long distance telecom, and the evolution of the internet. A lot had gone right.

Markets are discounting mechanisms, meaning stock prices or valuations are a game of expectations, constantly trying to surmise how the future will look. In 2000, the mismatch between expectations and the future could not have been larger. If you were investing back then, you might remember these:

1 — Field of Dreams strategy for growing demand
2 — Internet enables an asset-light business model (clicks not bricks)
3 — Increasing bandwidth demands continue to drive telecom forward

Field of Dreams strategy for growing demand

Back during the dot-com bubble, companies were so focused on customer acquisition at any and all costs that business sustainability was last on the order of priorities. Gather enough “eyeballs” and the future will take care of itself.

Take Pets.com, for example. This was a company spending endless cash on gathering demand via advertising, coupled with virtually no plan to achieve positive gross margins. Just check out their ad during Superbowl XXXIV.

Internet enables an asset-light business model (clicks not bricks)

There was an underlying assumption that a small asset base would be required to run businesses riding on the internet. The need for infrastructure required to support operations, logistics, and hardware capacity was an afterthought.

When Amazon did a bond offering in 2000, it was the harbinger of how asset intensive internet businesses were. There’s a reason why capex is the primary use of cash flow for today’s top-tier companies.

Increasing bandwidth demands continue to drive telecom forward

Underneath it all was the unwavering certainty that the telecom cycle would persist. Contrary to the expectations for online companies, telecom poured countless resources to building out long distance telephony networks. But long distance pricing collapsed, leading WorldCom to file for bankruptcy two years later in 2002.

No one saw it coming.

Today’s Tech Cycle

Today, we find ourselves at a similar crossroads. Are the high valuations justified as promised or are they going to fade into the ether like they did post 2000?

Here’s why they won’t.

1 — Demand is now real
2 — Ability to scale at lightning speed is possible
3 — Cloud cycle is just at the beginning

This is a different playing field, full stop.

Demand is now real

Contrary to the dot-com era, it’s clear many of today’s tech leaders serve as “must-haves’’ versus “nice-to-haves” given the productivity benefits afforded by their services.

Imagine navigating the depths of Covid without real-time access to information, commerce, and collaboration. Society and business would be a standstill. Instead, we now know that the world can and does move on.

Ability to scale at lightning speed is possible

Scaling operations can move in lock-step with demand thanks to the cloud. Take a look at Zoom. The company managed to grow 100% faster than its initial FY21 guidance a year ago while increasing cash flow 900%!

Cloud cycle is just at the beginning

While the telecom cycle was at the beginning of the end during the dot-com bubble, the cloud cycle is just at the end of the beginning.

If there’s any silver lining to Covid, it’s that it accelerated five years of behavioral changes into a matter of months.

As companies and people shift toward a virtual world, the net result will be that productivity gains will be larger and arrive even faster. What this means for today’s highflyers is that first movers are even more likely to become the dominant players.

As Carlota Perez articulates in her framework for technology evolution, we currently stand in the Turning Point phase where culture and technology collide. These behavioral shifts typically take five years or so. Covid has undoubtedly sped up this shift, but a pause or some type of pullback is not out of the question, indeed it’s likely.

While this phase can last a number of years, it’s also the necessary precursor into entering a multi-decade period of productivity booms.

Since tech’s essential purpose is to save time, we’re just now in the early innings of its full productivity potential proliferating into our lives.

So what does all this mean for investors?

Using the railroads as a historical analog dating back to the turn of the 20th century, broad market averages are likely to churn as their constituents’ stocks turnover.

We will continue to see corrections as we always do with tech at the epicenter. So long as the growth curves remain intact, however, stock prices for companies leveraging the railroads of today should follow (aka those that leverage the cloud).

What shouldn’t get lost, however, is that A) outstretched valuations are not solely tech-centric and B) normalized market valuations (excluding “the nifty 50”) are roughly on par with historical averages.

Excluding the roughly 55 companies trading above 50x earnings, the S&P’s market earnings multiple falls to 20x. These companies represent approximately $5T in market cap compared to the S&P aggregate of $36T. Moreover, Amazon, Tesla, and Disney comprise a market cap of $2.5T, or 50%, of the excluded list.

Bottom line, the market’s implied 22x P/E doesn’t necessarily capture the growth curve that some of these companies are on. This means massive turnover in the makeup of the stock market averages component parts is likely in the works.

As the old Bill Gates adage goes, people tend to overestimate changes over two years and underestimate the changes over ten. On that basis, many of today’s companies, including the giants, are at the nascency of a much longer story.

Some will stay, most won’t.

Clockwise Capital is an asset management firm with a private equity approach to the public markets. We focus on the meaning of time and the role it plays in people’s lives. We believe the essence of a great investment resides in the ability of a company to either save their customers time, or improve its quality. We understand how technology evolves to drive these two factors, which we believe define human progress. As a result, we search for securities with cyclically depressed valuations whose companies save time, thus using secularly advantaged industries to build a concentrated portfolio. With each series of investments our goal is to optimize edge, maximize return, while also minimizing correlation. This allows our portfolio to maintain a liquid, low duration fixed income balance, ready to capitalize on market volatility, while still generating market beating performance.