Technology stocks have taken a stumble over the last week after soaring to heights they last saw just before the dot-com bubble collapsed 17 years ago. Here's why this time might be different.
Technology companies are the main reason the stock market has climbed in recent months. The technology index of the Standard & Poor's 500 index is up 17 percent this year, twice as much as the broader S&P 500.
Last week they got close to the highs they set all the way back in March 2000. At that time, Mark Zuckerberg was in high school, the iPod didn't exist, and few people had any idea how a company could make money from internet searches.
What's different now? Unlike then, many of the market's favorite tech companies are actually making gobs of money.
"The sector is delivering on a lot of the promises that investors hoped for during the bubble years," Jack Ablin, chief investment officer for BMO Private Bank.
And yet last week, when the tech index seemed to be just minutes away from breaking a record, the stocks went into a steep slump. Some analysts think the stocks will fall a good deal further.
That might bring up bad memories of the tech bubble and its aftermath: the technology index peaked on March 27, 2000, but it nosedived following numerous high-profile company failures, the disastrous AOL-Time Warner merger, and the recession and stock market slump that followed the September 11th terrorist attacks. By late 2002, the tech index had fallen a staggering 80 percent from its peak.
Few investors expect that kind of catastrophe this time. One reason is that technology companies are very profitable now compared to then. After adjusting for inflation, the three largest technology companies of 2000, Microsoft, Cisco Systems and Intel, reported $113 billion in combined revenue that year. Apple alone reported $217 billion in revenue in 2016.
"We don't look at this to be the beginning of the end for the sector," said Terry Sandven, chief equity strategist for U.S. Bank Wealth Management. "Conditions are good for growth-oriented companies like tech."
Before the 2000 bubble burst, S&P 500 technology companies were trading at about 68 times their earnings. Today they are trading at about 21 times their earnings, a number that is much closer to where S&P 500 companies are usually valued.
To put it another way, investors value the technology sector at almost $5 trillion now. After adjustments for inflation, it was worth about $6.4 trillion in March 2000. That's for a group of companies that were newer, less tested, had far smaller profits and fewer sales, and paid smaller dividends.
According to numerous experts, the problem today is not that technology companies are trading on overly rosy growth projections or profits that may never materialize. The stocks have simply risen a lot more than the rest of the market. That can't continue indefinitely without a break.
While the possibilities of technology companies seemed intoxicating in the late 1990s, today it's easier to argue that the stock gains make sense because the really have changed the world. They've remade entertainment, and video game makers Activision Blizzard and Electronic Arts are some of the highest-flying technology companies this year.
Design software maker AutoDesk and Salesforce .com have rallied as new technology has reshaped business. With so much critical data now stored in the cloud, cloud computing-focused companies like Microsoft and Adobe Systems have surged. So have numerous chipmakers.
That said, some of the gains this year have been staggering. Despite their recent losses, Apple is up 23 percent this year and Facebook has jumped 27 percent. Alphabet, Google's parent company, has climbed 19 percent. Microsoft has gained 11 percent. Those are four of the five most valuable companies on the U.S. stock market today. The other member of the top five is Amazon, which isn't classified as a technology company.
After the huge losses of 2000-02, many investors steered clear of technology stocks. It took about six years for the S&P 500 to recover from the losses it took in 2000, and it took the tech index twice that long.
"Tech bounced along the bottom for six years" after the bubble burst, Ablin says. "Investors are always fearful of the last crisis, and investors may have just washed their hands of tech."
That, too, is hard to picture today. Sandven, of U.S. Bank, said the stocks should do well as long as the U.S. economy keeps growing and their earnings rise.
"We think there's still more upside," he said. "We still like the outlook for many of these companies."
© 2017 Associated Press
syndicated under contract with NewsEdge/Acquire Media. All rights reserved.