Or, as Hwang puts it: “The whole edifice of online advertising is, in short, bunk.”
These problems aren’t entirely new, of course. Hwang cites an adage attributed to the 19th-century businessman John Wanamaker: “Half the money I spend on advertising is wasted; the trouble is, I don’t know which half.” But Wanamaker was grappling only with the problem of attribution—figuring out whether the money he spent on a newspaper ad, say, drove sales that otherwise wouldn’t have happened. Today’s programmatic advertising has that issue in spades, plus the extensive problems of placement and fraud. At least Wanamaker could check that his ads had actually appeared in the newspaper.
Had the biggest ad agencies of the analog age—companies like Oglivy or WPP—gone belly-up in the 1980s, the fallout would have been limited to Madison Avenue. Now the central players are Facebook and Google, with Amazon racing to join them. Those three companies alone account for roughly 10 percent of the US stock market’s total value. Their destiny is bound up with that of the global economy.
What would it look like if the ad bubble burst? Hwang compares today’s units of online ad inventory with the toxic securities of 2007: Both derive their value from an overvalued, hidden asset. (For one, it’s a shaky home mortgage; for the other, a user’s putative attention.) It would be more apt, however, to compare those pre-recession financial instruments with the stocks of companies that make their money from digital advertising. The sale of a moment of an internet user’s attention is a one-time transaction. A financial bubble, however, requires an investment made at time A to prove worthless at time B. A mortgage-backed security is, well, a security: an investment backed by the future value of the underlying mortgages. A share of Facebook or
Despite an ongoing pandemic and the U.S. economy barely limping along, the Nasdaq is still trading more than 50% above its March lows. The surge in tech stocks in 2020 has understandably led investors to draw comparisons to the dot-com bubble in 2000.
The Nasdaq ultimately peaked at 5,048.62 on March 10, 2000. Of course, some dot-com bubble stocks have performed much better than others in the 20 years since the bubble burst.
FANG Stocks Of Dot Com Bubble: Today’s investors are very familiar with the FANG stocks, Facebook, Inc. (NASDAQ: FB), Amazon.com, Inc. (NASDAQ: AMZN), Netflix, Inc. (NASDAQ: NFLX) and Alphabet, Inc. (NASDAQ: GOOGL) (NASDAQ: GOOGL). These four stocks both led the bull market since the 2008 financial crisis and dominate today’s market with their massive market caps.
The dot-com had its own growth of FANG-esque stocks that dominated the tech sector back in 2000:
Microsoft Corporation (NASDAQ: MSFT) reached a dot-com bubble peak market cap of $561 billion back in March 2000.
Cisco Systems, Inc. (NASDAQ: CSCO) reached a peak market cap of $555.4 billion.
Intel Corporation (NASDAQ: INTC) peaked at a $509 billion market cap in August 2000.
Oracle Corporation (NYSE: ORCL) had its dot com market cap top out at $245 billion in March 2000.
Finally, IBM (NYSE: IBM) had a peak dot com-era market cap of $215 billion.
Altogether, these five tech stocks had a peak combined dot com market cap of more than $2.08 trillion, but that valuation certainly didn’t last for long.
See Also: 5 Ways Today’s Market Resembles The Dot-Com Bubble
Dot-Com Bubble Fallout: A year after the Nasdaq peaked in March 2000, the Nasdaq was down 59.3%. All five of these big tech stocks had taken a hit. IBM was the most resilient of the group, declining just 5.4%. Microsoft shares
- Legendary tech investor Bill Gurley told CNBC on Friday that the stock market reminds him of the late ’90s dot-com bubble.
- “There is certainly what I would call a highly speculative nature to the markets today, a willingness to take on risks, a willingness to get excited about projects that may be five or 10 years in the future,” the Benchmark partner said.
- Other investors like Stanley Druckenmiller have drawn similar conclusions about today’s technology stocks.
Legendary venture capitalist Bill Gurley told CNBC on Friday that the stock market reminds him of the late-1990s tech trading environment that led to the dot-com bubble.
“There is certainly what I would call a highly speculative nature to the markets today, a willingness to take on risks, a willingness to get excited about projects that may be five or 10 years in the future, that we haven’t seen since the ’99 time frame,” the Benchmark partner said.
He added: “I really can’t speculate or know exactly what it was, or the confluence of events that led to that, but we are living in a more speculative technology market for sure.”
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Other investors have echoed these concerns about frenzied traders pushing technology stocks into dangerously high territories. The top five tech stocks — Microsoft, Apple, Amazon, Alphabet, and Facebook — make up nearly a quarter of the S&P 500.
Billionaire investor Stanley Druckenmiller said in September that the market was in
Since the U.S. stock market started its rebound in early April of this year, technology has been the leading sector. Driven initially by mega-cap tech behemoths Amazon
Many investors and pundits are concerned that tech stocks are experiencing a bubble, as in 1999‒2000. However, instead of excessive optimism about the future, rising tech valuations may reflect pessimism about future economic growth and profit weakness in other sectors. Given the current high unemployment rate of 8.4% and the large number of small business closures, Consumer Cyclical, Basic Material, and Energy stocks could have muted profits for an extended period. Technology’s secular growth, fueled by the Internet, cloud computing, ecommerce, and the ongoing digital transformation of business, is simply more attractive to investors than most other parts of the market.
S&P 500 overall earnings are expected to decline 3% in 2020 when companies with losses are excluded (see table above). However, Wall Street is optimistic for 2021, expecting a 13% bounce in profits. Many of 2020’s worst sectors are expected to have the highest earnings growth next year. Cyclical groups are expected to have the fastest profit growth, led by Energy (+20%), Transportation (+19%), Consumer Cyclical (+19%), and Basic Material (+18%). In contrast, Technology is only expected to grow roughly in line with the overall market at +14%. Given Technology earnings’ modest expectations and comparatively secular nature, the sector is more likely to meet earnings expectations than cyclical sectors with higher expectations.
I believe investors are still cautious or negative on the U.S. economy, so they will pay a premium for Technology stocks