photo by Flickr user bfishadow
The Nasdaq composite index was at about 4980 when I drafted this post last week. That means it has almost recovered from the crash.
No, not that crash. The other one.
The Nasdaq composite reached its closing high of 5048.62 on March 10, 2000. That high, however, was short-lived, brought down by the dot-com collapse. Over the next 31 months, the index lost nearly 80 percent of its value, bottoming out at 1114.11 in October of 2002. For comparison, the Standard & Poor’s 500 index also dropped (though not as severely) from its 2000 high over that period, but by October 2007 the S&P had regained the lost ground. Then the Great Recession hit, but we have long since surpassed that 2007 S&P high-water mark. The Nasdaq, on the other hand, has taken 15 years to recover.
The securities that are reflected in the Nasdaq composite are heavily weighted in the tech sector, so it is easy to see why the dot-com collapse hit the Nasdaq index especially hard. But why has it been such a long uphill climb to recover?
Several factors are clear in hindsight. First, it is worth remembering that Internet and technology companies rise and fall very quickly in relative terms. Of the three large stocks Bloomberg noted as drivers behind the index’s recent rally, in 2000 Apple was beginning its comeback as a PC vendor but was still a year away from introducing the first iPod and seven years away from the iPhone; Amazon had yet to report its first net profit; and Netflix had yet to make its initial public offering at all.
This alone, though, doesn’t really paint a picture of just how different the online landscape was in late 2000. That October brought the first Google ads targeted to keywords; the main page of the search engine still featured a link to a web directory, a concept that feels hopelessly archaic today. The company would not go public until 2004. In the fall of 2000, Mark Zuckerberg was still in high school, and LinkedIn and Twitter were also still years away from existing. Then-dominant AOL had just merged with Time Warner and Yahoo’s stock price hit its all-time high that year.
In those days, Pets.com, Webvan Inc. and other Internet start-ups seemed like great ways for investors to capitalize on the possibilities offered by online retail. Yet after quickly going public, many of these companies could not find a way to profit after raising millions in venture capital. At the time, start-ups often didn’t need a plan beyond “the potential of the Web.” The bubble existed precisely because a large group of people convinced themselves that new technology rendered past constraints irrelevant. Too much optimism meant everyone thought they could get slices of an infinitely large pie.
Today we know better, or at least somewhat better. I do not believe we are in another tech bubble the way we were when we were partying because it actually was 1999. Yet there are some reminders of that late-90s optimism out there. Today Silicon Valley is not just a place, but a TV show on HBO about young techies trying to make it rich. In 2000, everyone wanted to build the next hot website. Today, everyone wants to build the next hot app. The optimism may be more tempered, but there are still plenty of people who see start-ups as path to quick prosperity.
After a fallow period, tech company IPOs are also trendy again. Facebook’s 2012 offering got off to a bumpy start, but also drew a lot of public attention. Yet after its controversial debut, the social network has largely overcome many of its initial hurdles, setting the stage for Twitter and a variety of other tech companies to follow with public offerings of their own. Today, you may no longer be able to “bring a chair and a desk public,” as Scott Sweet, senior managing partner of the IPO Boutique, described the dot-com bubble to The Wall Street Journal in 2010. But, unlike five years ago, the idea of building a tech company toward an IPO no longer seems a steep hurdle to clear for enterprises that enjoy a decent level of success. Last year, 46 technology companies went public, according to University of Florida professor Jay Ritter. In 2000 that number was 261; by 2008 it had dropped to 6.
“What was propelling the Nasdaq in the year 2000 was a dream,” Gavin Baker, who runs the Nasdaq-focused Fidelity OTC Portfolio fund, told Barron’s recently. “What’s driving the Nasdaq today is reality. The current valuation is very well supported by earnings and cash flows and if those earnings and cash flows continue growing, the Nasdaq should continue going up.”
By any rational measures, technology stocks are still pretty pricey these days as a class. But their prices are not crazy relative to their value - at least not yet. Nobody today believes profits don’t matter, either, though early investors are often willing to wait for a reasonable length of time to see money come rolling in. Perhaps the biggest difference, whether we’re talking about Uber or Amazon (itself a survivor of the first dot-com crash), is that today people generally focus on building businesses to run, rather than to sell. Instead of rushing immature companies into the market, today’s successes are generally based on solid, sustainable business models. Whether these companies succeed or fail, investors no longer believe tech start-ups are magical machines for generating money out of thin air.
There are still cautionary lessons from the dot-com crash worth remembering. But even as we try to recall them, it will be nice when, probably sometime soon, we finally overtake the Nasdaq index’s old peak and officially put the Internet bubble behind us.