If you’re reading this email, chances are you are all too aware that the past few months have been tough for stocks. Especially over in the US. This year, the S&P 500 is down 18%, and tech stocks are down 30%. In the unprofitable side of of the market, it’s even worse. Roundhill’s meme stock index is down 50% year to date, and Ark’s Innovation ETF is down 55%.
This feels catastrophic, but it is still a fair way off the 2000-01 tech wreck when tech stocks eventually dropped 80%.
When we compare these two eras, it is rightfully pointed out that the companies are different this time. In 2000 the internet companies weren’t profitable and many weren’t even generating revenue. Investment banks were valuing pre-revenue internet stocks on invented metrics like ‘price-per-website-visitor’. In 2022, it is different. These internet and software companies print billions in revenue and the most established of them – Microsoft, Alphabet, Salesforce, Adobe – are incredibly profitable.
But in the spirit of Mark Twain’s famous ‘history doesn’t repeat itself, but it often rhymes’ there were plenty of problematic companies, it just wasn’t the internet companies this time. Rather it was all those companies that we treated as internet companies that just weren’t quite so. Beyond Meat’s plant-based meat, Virgin Galactic’s space tourism, Nikola’s hydrogen trucks, Peloton’s exercise bikes, WeWork’s shared office spaces. We treated them as internet or software companies – happy to watch them lose money for years. But unlike internet or software companies they don’t enjoy the same operating leverage as they scale. So they kept losing money while the market kept funding them.
So, just like in 2000, a speculative bubble formed that allowed prices to get divorced from the underlying financials of these businesses. And, just like in the post-2000 market, plenty of these companies will emerge from the other side of this sell off. Likely with a renewed focus on profitability alongside investors with a renewed focus on valuation. The challenge, and opportunity, for investors in a moment like this is to determine which of these companies will emerge stronger, and which will become the cautionary tales of this market sell off.
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