Comparisons aplenty, but not all are fair. Given the stellar rally of Big Tech and technology stocks over the past year, it was inevitable that parallels would be drawn to the dot-com bubble of 2000. In fact, market observers have gone as far as comparing Nvidia to the dot-com era Cisco, citing similarities in the steep run-up in prices as well as their poster child status within the tech space. While such comparisons are understandable – the price momentum and sectors involved in today’s tech rally do bear some resemblance to dot-com – we believe that they should be taken more as food for thought than a direct cautionary tale. This is because, barring some of the superficial similarities highlighted above, the world and the technology sector today is vastly different from what it was during the dot-com bubble.

Not an asset bubble in the making. While the dot-com crash was a painful event for many investors, it served an important function of trimming the fat in the US stock market. After the bubble burst in 2000, many companies that sought to ride the novelty of the dot-com concept wound up after burning through their funding and failing to become profitable. What remained were companies that had solid fundamentals, many of which became highly profitable and successful. Many of these surviving names have now become part of today’s Magnificent Seven. And the important thing to note about these companies is that, unlike their dot-com era predecessors, their share price performance is backed up by sound fundamentals.

Performance backed by strong earnings. The Magnificent Seven and other tech sector leaders have been delivering EPS growth that far exceeds that of the dot-com era companies, and as a result we are seeing less extreme multiple expansion even though prices have run up significantly. The disjoint between share price performance and underlying earnings that we saw during the dot-com bubble is simply not there with the Big Tech companies of today.

More money, less problems. Another key difference is that majority of Big Tech companies today have a much stronger capital position than their dot-com era counterparts; they have grown much larger, but at the same time are more lowly-geared, and have significantly higher cash balances. In addition to added financial resilience and stability, large cash piles have also been bestowed upon Big Tech, with the ability to partake in opportunistic M&A to further grow their earnings ability and deepen their innovation moat. As at Dec 2023, the collective cash balance of the Magnificent Seven stood at a massive USD240b. To put things into perspective, this amount is roughly equivalent to the size of New Zealand’s GDP or four times the cash acquisition value of Activision Blizzard paid by Microsoft (USD61b). The robust balance sheet of modern-day Big Tech companies is yet another reason why we will likely not see a dot-com redux.

Post dot-com, Tech runs the world. There is little doubt that technology companies have come a long way since the dot-com bubble, and just as evident is how different the world is today compared to the early 2000s; the advent of the smartphone, the rise of social media, and the overall digital transformation undertaken by society has completely changed the way people live, work and play. Based on World Bank estimates, the percentage of the global population using the internet back in 2000 was a mere 6.7%. However, fast-forward to 2021, that number has jumped almost tenfold to 63.1%. This has facilitated the greatest secular trend of our generation: the world becoming a digital economy. Riding on this trend, the technology sector has found waves of further monetisation opportunities, which has in turn solidified their profitability. It has also ushered in a new paradigm for global IT spending; the direct total addressable market (TAM) for technology is expected to grow to USD5.3t by 2025. The indirect benefits, however, will likely far exceed this amount as growth in the technology space will have profound impact to a wide range of industries and firms operating across the globe. Simply put, technology makes up a far greater proportion of global GDP than it did in 2000, and that can only be beneficial for Big Tech and technology companies in general.

Anchor with DBS CIO I.D.E.A for quality growth. Having established that the current technology rally is not a bubble, we advocate for investors to continue staying engaged with the markets and having meaningful portfolio exposure to Big Tech names for their quality growth characteristics. We cover in greater detail, the value proposition of investing in Big Tech in an earlier CIO Perspectives titled “Global Big Tech – Quality GARP”. Beyond Big Tech, look to also add quality growth names from other sectors like luxury and healthcare, as well as thematic areas of focus such as the energy transition using the DBS CIO I.D.E.A (Innovators, Disruptors, Enablers, and Adapters) framework.