Analysts and venture capitalists say the tech crash taught investors a seemingly simple lesson that had been lost in the flurry of public stock offerings by Silicon Valley start-ups with not a scrap of revenue – sales and profits, or at least the prospect of profits, matter.
Today, the Nasdaq index rests at less than half its peak, and many of the biggest names from 2000 – IBM, Hewlett-Packard and Microsoft – are trading more like traditional stocks, based on their fundamentals.
Finding the growth stocks, the companies of the future, has become trickier, investors say.
“Tech stocks were once viewed as unique and different, an industry that would grow rapidly and support extraordinarily high valuations,” said Ken Allen, portfolio manager at T. Rowe Price. “We learned a lot about the flaws in that logic. Tech stocks by and large are pretty comparable to other stocks.”
Shares of select tech names have thrived over the past decade. These include companies such as Apple Inc, Amazon.com Inc and Research in Motion Ltd, which have products that defined their category.
Google Inc and Salesforce.com Inc, which went public in 2004, have seen their shares more than quadruple.
But many of technology’s leading lights have never come close to regaining their past glory. Shares of Cisco Systems Inc, Yahoo Inc and Intel Corp are down more than 50 percent from that time.
Price-to-earnings multiples have compressed over the past decade as tech investing has become more “rational,” said Jeffrey Lin, an analyst at investment manager TCW Group.
Microsoft’s trailing price-to-earnings ratio topped 70 times in early 2000, and today it is roughly 16 times. IBM’s P/E ratio was more than 30 times in 2000, but now sits at 13.
“I feel good about tech stocks this decade because we don’t have this big valuation headwind like we did 10 years ago,” Lin said. But he estimated the Nasdaq will take another seven to eight years before it can surpass the March 2000 peak.
VC slump
In the late 1990s, investors bought shares at sky-high valuations and paid for growth they assumed would materialise.
The early 2000 rise of the Nasdaq composite was meteoric and, in retrospect, absurd. The index surged from 3,000 to above 5,000 in four months.
The January 2000 Super Bowl football championship was probably the clearest sign of an impending crash, with the broadcast overrun by dot-com commercials. Firms from the now infamous pet supply retailer pets.com to the long-forgotten online marketing company LifeMinders.com forked over more than $2m each to buy 30-second TV ads.
Barry Eggers, a founder of venture capital firm Lightspeed Venture Partners – an investor in companies such as Brocade Communications Systems and Ciena Corp, and more recently social gaming firm Playdom, said he remembers getting nervous as he saw the “froth” in the market.
Companies and their VC backers had been under tremendous pressure to go public quickly, he said.
“Those were the days when it was a lot easier to go public, and if you didn’t get public or get acquired for a large number, it was a very unsuccessful outcome,” Eggers said.
Today it takes roughly seven to eight years for an initial investment in a company to make a return, he said, but in the tech boom, it took only three to four years.
“What was driving all that was the growth opportunity.” Now he said, “We’ve learned to be more patient.”
Venture capital firms were hit hard when the bubble burst, and more recently when the financial crisis and recession struck. In 2009, VC fundraising fell 47 percent to $15.2bn, the lowest level since 2003, according to data from Thomson Reuters and the National Venture Capital Association.
Patience
Tech investors as a whole have learned to be more patient as industry growth rates normalised. But divining the latest hot trend – whether it be social networks, social gaming or mobile internet – is more challenging than ever.
“Gone are the days of 30 to 40 percent projected CAGRs (compound annual growth rates),” said Broadpoint Amtech analyst Brian Marshall.
He recommends that investors find “idiosyncratic, secular growth stories,” such as Apple, VMware and NetApp, as new technologies like smartphones and virtualisation disrupt older ones like PCs and servers.
“You want to play the themes that have the most robust outlooks, and then you identify the leaders that have the best opportunity to grow,” he said.
Marshall said the Nasdaq in 2009 and 2010 will mirror that of 2003 to 2004 when the market emerged from the dot-com crash, and thinks money will soon head for growth stocks over value.
He said the Nasdaq could make it all the way back to the March 2000 heights in five to 10 years.
“I hope,” he added.
