I often reflect upon the 1999 - 2000 Nasdaq bubble to understand market dynamics and investor behavior.
Years after the bubble burst, young traders I worked with would inquire, "What was the bubble like?" Today, traders no longer feel compelled to ask that question since the recent investor irrationality has mirrored the excesses of the past.
From the rise and fall of pandemic beneficiary stocks like Zoom Video (ZM) , Peloton (PTON) , and Teladoc (TDOC) , to the clamor for SPACs and meme stocks, the investor psychology rang a similar tone to 20+ years ago when investors wanted to get aboard internet-related stocks at any price.
Similar to today's markets, when the bubble burst in 2000, unjustifiably high-priced stocks fell back to earth, trading lower than one would think possible just months earlier.
In 2000, out of the wreckage emerged a handful of tech stocks -- Seibel Systems, Juniper Networks (JNPR) , Broadcom (AVGO) , and EMC -- that made new highs many months after the Nasdaq's peak in March. It was as if investors declared, "Those other tech stocks may have been wrong, but we've separated the wheat from the chaff and found the right ones to buy." In the fall of 2000, this last cohort of perceived winners finally succumbed to weakening business trends from the ensuing recession, and they, too, fell dramatically.
The current state of tech stocks is apt to be similar to this bit of history. Where most stocks will struggle and never see new highs, Microsoft (MSFT) and Apple (AAPL) can be part of a group of winners that can move on to new highs, regardless of the tech wreckage that's transpired.
The earnings that both companies reported were outstanding and set them far apart from most of their tech brethren. The easiest decision for institutions is to buy Microsoft and Apple for tech and growth exposure.
With the recent selloff, Microsoft's valuation has come down to more reasonable levels, around 29x forward earnings estimates. The company's diversified businesses, copious cash flow, and broadening business lines give investors exposure to growing cloud, enterprise, and gaming areas. Its HoloLens and potential acquisition of Activision Blizzard (ATVI) broadens Microsoft's importance in developing the metaverse.
The bull case on Apple forms easily. Apple's products are in great demand, massive cash flow is sent back to the shareholders through buybacks, services have offered significant diversification with high margins, plus it has an R&D pipeline of products yet to be unveiled.
The two most rumored Apple products to come are a headset, capable of AR and VR, and an autonomous vehicle. Apple will probably grow earnings in the high single digits for the foreseeable future. Margins have continued to increase by designing chips in-house and an expansion of service offerings.
There's a possibility that the market rallies become narrower in the near future, leaving many tech stocks behind. Investors will look for durable winners after getting burned on high-flying stocks trading at many multiples to sales with little to no profit.
Although not unknown nor cheap, Microsoft and Apple stocks are proven winners, reporting solid earnings while expanding their reach into new fields. These stocks are a buy on tech weakness and can see new highs later this year.
