July 2024

On 18 June 2024 a significant event took place in the global economy. Tech giant Nvidia briefly overtook Microsoft to become the most valuable public company (based on market value) with a market cap of US $3.3 trillion. Nvidia Corporation is known for designing and manufacturing graphics processing units; computer chips or semiconductors needed to produce visual content on computers and smart phones. Nvidia’s market share sits at around 80% and its rise has been gradual and synonymous with the increased demand of tech giants in the pursuit of dominance in AI innovation.

It has raised concerns of a repeat of the dotcom bubble of 1995 – 2000 when speculation over Internet-based companies was caused by excitement around this new breed of tech firms. The subsequent crash was due to the market-wide frenzy around these companies, and their overvaluation.

NVIDIA and the Magnificent Seven

The Magnificent Seven refers to the seven tech goliaths – Apple, Amazon, Alphabet, Meta, Microsoft, NVIDIA and Tesla. NVIDIA has led the way with a 154.1% price increase through the first half of the year as fellow tech behemoths turn to them to accommodate their AI needs. It is reported that Microsoft on its own makes up 15% of NVIDIA’s revenue with the Magnificent Seven (outside of themselves) accounting for roughly 40% of their revenue.

The Dotcom Bubble

The astronomical gains from tech stocks during the dotcom bubble and the crash that followed has raised some concerns for the current economic environment. when the bubble burst in the early 2000s we witnessed massive sell-offs of stocks with many dotcoms being declared bankrupt. From its peak in March 2000 to its trough in October 2002, the Nasdaq lost over 78% of its value. There were massive job losses in the technology sector and investors lost confidence in the share market.

Is There a Difference This Time?

The prospects of another tech bubble should not be taken lightly but do determine whether any panic is warranted, it is necessary to determine if any characteristics of a bubble exist such as market sentiment, stretched valuations or irrational exuberance.

• Market Sentiment: Looking at the Magnificent Seven specifically, their combined market cap would make them the second largest stock exchange in the world, returning an impressive 107% last year. In the first week of July the S&P500 and Nasdaq100 indices achieved new all-time highs following a surge from the Magnificent Seven which further highlights the market sentiment of the mega-cap tech stocks.
   
• Stretched Valuations: This is the most important characteristic when comparing the current environment to the dotcom bubble. At the peak of the dotcom bubble, the likes of Cisco and Oracle traded anywhere between 80-130x price-earnings ratio (forward earnings). NVIDIA’s forward PE ratio was still below 50 (49.05) in mid July, the trio of Microsoft, Apple, and Amazon were in the low 30s, with Alphabet below 25 and comparable to the S&P Index average of 22.7.
   
• Irrational Exuberance: The sharp increase in prices is undeniable and with the unprecedented levels of access to digital content, there is always going to be an element of media frenzy. Even so, prices are yet to exceed historic norms or fundamental value. Moreover, the ‘fear of missing out’ element is lacking and this is in part due to the fact that current tech giants such as Apple, Nvidia and Microsoft have been sustainable and profitable for decades.

Many experts believe we are not even close to a bubble as the present big tech companies are generating enormous amounts of cash flow and creating innovative products/systems which are generating immediate returns.

The harsh reality is that some investors have learned from the past while others have not. The dotcom bubble was not the first and will likely not be the last. That said, there are positive signs for today’s investors as they are favouring profitable companies rather than unprofitable companies requiring venture capital.