Three reasons why this tech sell-off is not Dotcom 2.0

“Big tech’s valuation has risen steadily for a few years and it’s quite big now, but it’s clearly not in the same league as the IT sector when the dot com mania was in full swing,” says Oliver Jones,  an economist at Capital Economics. “This is one reason why we remain wary of the idea that big tech firms’ share prices will soon collapse under their own weight.”

To some, the sell-off could have been sparked by those viewing the stocks as overvalued. 

Helal Miah, an analyst at The Share Centre, says that some stocks could have been dumped for more “old economy” bets that had taken a beating during the pandemic. 

“The big question is whether this is just a mini correction or something more significant,” he says. “A more material correction may be on the way but I am inclined to think that this is just a modest and healthy adjustment, the main reason being that nothing has fundamentally changed in the last few days.”

Tech’s 2020 rally is backed up by outsized earnings

Perhaps one of the biggest differences between this year’s run on tech and the craze at the turn of the millennium is the fundamentals of the businesses involved.

Apple, Amazon, Facebook, and Google all report enormous profits and boast extremely strong balance sheets. In the case of Apple, it had more than $200bn in cash on hand at the start of the year. Their profits are huge. Apple reported more than $11bn in profit in the second quarter, Microsoft $11.6bn, Amazon $5.2bn.

In the case of many of the biggest stocks they also hold massive market shares that border on near-monopolies in many cases. 

When you look at the current price-to-earnings ratios of Big Tech giants now, relative to what was happening during the dot com era, the difference is clear. This chart from Capital Economics shows that while Big Tech’s price-to-earnings has grown, it is still relatively stable.