Wharton professor Jeremy J. Siegel is famous for calling the tech bubble of 2000. His articles "Are Internet Stocks Overvalued? Are They Ever" and "Big-Cap Tech Stocks are a Sucker Bet" were extremely popular back in 1999 and 2000. Jeremy Siegel recently made the news by saying the bond market is in a bubble right now. Also, he sounds extremely bullish in this interview about stocks. Coming from a man who called the greatest bubble in recent memory, that is indeed good news for stock investors. So, this article looks at the similarities and the differences between market conditions in 2000 and 2012. In addition, we also look at the two "new" market leaders in 2000 and 2012 as leaders often dictate the course of the market.
· New Market Leaders: Cisco Systems (NASDAQ:CSCO) was undoubtedly the leader and the most loved stock of 1990 and early 2000s. Apple (NASDAQ:AAPL) takes that spot for the current period. Apple consumers can't get enough of its products and line up each time a new product or a product refresh is released. Cisco and Apple replaced stocks like General Electric (NYSE:GE) and Exxon Mobil (NYSE:XOM)
- Plenty of IPOs: One of the strong indicators of a bubble is the increase in the number of IPOs in a particular sector. The late 1990s had so many new IT related companies become public - Boo.com, Startups.com, open.com, WorldCom and theGlobe.com. In 2011/2012, we have a lot of new social media floats like Groupon (NASDAQ:GRPN), Zynga (NASDAQ:ZNGA), Zillow (NASDAQ:Z) and the upcoming giant, Facebook (NASDAQ:FB).
- Love affair with stocks: People back then loved their AOLs (NYSE:AOL) and Ciscos and today, the term "Apple Fan boy" is floating all over the place today.
- Absurd calls about market leaders: Cisco was and Apple is predicted to reach an unimaginable market cap of $1 Trillion. And everyone knows how it ended with Cisco.
- Volatility: Bubbles are preceded by very low volatility, as can be seen in VIX's record back in 1999 and 2000. The VIX was anything but stable in 2011 and is now beginning to show its movements in 2012.
- Venture Capital Inflow: It will not be an understatement to say the Venture capitalists played a huge role in the bubble and subsequent burst in 2000. Then, the VCs flushed in more than $200 Billion into new companies in about 2 years. The figure for the same time period now stands at about $50 Billion.
- Performance of new issues: While there have been a number of tech related new issues in 2011, not many of them doubled or tripled on the first day of trading, which is exactly what happened during the tech bubble of 2000.
· Market Leader Differences - (This is where the focus is mainly on Cisco of 2000 and Apple of 2012.)
i) Valuation: Cisco was consistently trading at triple digit PE during the height of the tech bubble. Today, Apple is fortunate to cross a PE of 15.
ii) Unknown Market Leader: Back in 1990s, in a survey by Jeremy Siegel, most of the investing public had no idea what Cisco systems did for a living. And today, we see so many not so tech-savvy people using iPhones, iPads etc and most if not all the investors know what Apple is about.
iii) Flimsy model: Companies like Cisco and Nortel relied heavily on the expansion of bandwidth beyond reasonable level. The infrastructure and supply exceeded the actual demand by a wide margin. Apple's case seems to be the reverse. They seem to be running short of supply each time a new product is announced. People pre-order their iPads and iPhones and wait to get their hands on one.
iv) Unsustainable: Looking back at Cisco's record in the decade 1990 to 2000, it acquired more than 50 companies to keep expanding. This model is unsustainable for most companies. Whereas, Apple today is focused on bringing great products that the competition cannot match up to. Yes, eventually Apple will have to slow down but from what we've seen so far, Apple is resistant towards major acquisitions and that it would instead focus on disrupting more industries.
Our Take: It is very hard to believe we are in a market or even tech bubble right now. We might be in a narrow "social media" bubble at the moment though depending on how Facebook does especially. Yes, we do have a lot of other stocks trading at hefty premiums like Salesforce.com (NYSE:CRM) and even Amazon (NASDAQ:AMZN). But at the other end of the spectrum we have companies reporting record earnings and trading at more reasonable valuations. Earnings and profits did not seem to matter back during the bubble, evidenced by the 100+ PE carried by the NASDAQ. Right now, the forward PE of Nasdaq is about 15. Mr. Siegel also states that the current low interest rate is very good for stocks as his research suggests people look at stocks favorably when the alternatives aren't any better. How simple!
Disclosure: I am long AAPL.