Analysis shows inflated valuations across technology sub-sectors, but just two are of potential concern
Many investors might be concerned about the rich valuations of tech companies, maintaining that they open the door to a repeat of the dot-com bubble 20 years ago. But a new analysis suggests that the current tech industry bears only a passing resemblance to that troubling time.
In a blog post published by the CFA Institute, Derek Horstmeyer and Chaitanaya M. Vij of the George Mason University School of Business compared the landscape of NASDAQ-listed tech firms during September 2020 to that from March 2000, and divided each into 15 corresponding sub-industries.
“[M]ore than half of the companies in the year 2000 sample had negative earnings and thus lacked a usable P/E,” they said, explaining why they used median price-to-book (P/B) and price-to-sales (P/S) ratios to see where valuations of each tech sub-industry stood during those two different points in time.
Across the 15 sub-industries, they found that the median tech-sector firm of March 2000 had a P/B valuation level that was twice that of its September 2020 counterpart. On a P/S basis, the median dot-com-era tech company’s valuation was three times that of its current equivalent.
Looking at each sub-industry, they found only two whose September 2020 valuations were comparable to those in March 2020. In the Electronic Gaming category, they said the September 2020 median company had a P/S valuation surpassing that of its March 2000 predecessor. For the median Scientific Equipment company, both median P/S and P/B valuations were higher in September 2020 than in March 2000.
“Notably, the Internet Content category had a median P/S ratio of 32.44 in March 2000 compared to 3.15 in September 2020, while the median Semiconductor firm had a P/B ratio of 13.85 in March 2000 and 3.32 in September 2020,” Horstmeyer and Vij said.
The pair said most subcategories showed higher valuation levels in September 2020 than in nearly all other years aside from the lead-up to the tech bubble in 1998 and 1999. But as much as some might warn of a technology collapse, they said the industry is nowhere near as frothy as it was in 2000.
“Whatever the current era for tech stocks, it is not a dot-com redux,” they said.
