Are we in a new tech bubble? Arguably, yes. But I think it's a narrower bubble on the whole than what transpired in 1999/2000.
To be sure, forward sales, earnings and free cash flow multiples are above historical norms across broad swaths of tech right now -- for everything from big-cap tech to semis, software and Internet companies. And though there are some exceptions, the companies whose multiples remain within or below their historical ranges are often value traps.
Throw in the fact that interest rates remain at rock-bottom levels, that COVID has accelerated tech adoption in a number of different ways, and that the Fed and Congress' actions this year have given investors greater confidence about future policy responses to macro downturns, and a lot of tech valuations simply look moderately high, rather than in nosebleed territory.
But there are some areas where valuations have gotten pretty out of hand. One can chalk it up to a few different factors, perhaps the biggest of which are:
- A major influx of new retail investors, some of whom have also taken a liking to options trading.
- Enthusiasm over the giant, COVID-driven, demand surges that certain tech firms have seen this year.
- Many retail and institutional investors alike being convinced -- following a decade or so of growth stocks outperforming value stocks -- that buying high-growth tech companies is a bulletproof investing strategy, even as multiples get quite stretched.
Electric car companies are definitely one area where investors have often gotten carried away.
When not one but three Chinese EV makers (Nio (NIO) , Xpeng and BYD) are worth more than Ford (F) , when several different EV SPACs currently producing no revenue are worth a few billion or more, and when Tesla (TSLA) ($539 billion market cap as of Wednesday's close) is worth more than most auto incumbents combined, you have reasons to think that markets aren't taking a level-headed approach to valuing companies that (while participating in a market that has a lot of growth in front of it) operate in a very capital-intensive industry and will often have their hands full competing against both auto incumbents and each other.
You also have some bubble-like behavior taking place among consumer-centric tech companies operating in industries that have seen demand inflect this year. Think companies such as Peloton (PTON) , Unity Software (U) and BigCommerce (BIGC) .
Here, investors often seem much too complacent about the risk that growth could slow down considerably once COVID vaccines are widely available. And in some cases, they also seem too complacent about company-specific threats -- for example, all of the new competition that Peloton is now seeing, or the impact that new iOS privacy controls could have on Unity's large mobile ad business.
Finally, select high-growth software firms have been bid up to sky-high multiples. The list includes names that have become retail favorites (think Palantir (PLTR) or Zoom (ZM) ), as well as names that have seen COVID-related demand jumps (thnk Zoom, Zscaler (ZS) or nCino (NCNO) ). And there are also a few that don't fit neatly into either category (think Datadog (DDOG) or Coupa Software (COUP) ).
Outside of select names such as Zoom, growth might not slow down dramatically for these companies post-COVID, and in some cases might actually accelerate a bit. As a result, barring major macro pressures, one could see high-growth software being an area that in many cases sees valuations gradually deflate, rather than dramatically collapse.
But one way or another, the kind of irrational exuberance being shown right now towards the companies mentioned above tends to end badly for investors buying in late.