Is this another dotcom bubble?

The tech-heavy Nasdaq index is back to its old highs last seen at the peak of the dotcom bubble. But this time it's different.

Round stockmarket numbers are often big occasions. But "this one carries with it quite a bit more baggage" than most, says Ari Levy on cnbc.com.

In March 2000, the Nasdaq Composite index eclipsed 5,000, marking the peak of the dotcom bubble. A few days later it began an 80% decline that bottomed out in 2002. So now that the index is finally back to its old high, should we expect a repeat performance?

It's far less likely than last time. Back then, the Nasdaq 5,000 was "madness", says Levy "$5trn of paper wealth waiting to evaporate". Hopelessly unprofitable companies, such as Pets.com and Webvan (destined to end up in MoneyWeek's "dotcom disaster of the week" column), queued up to float.

They were fought over by investors bedazzled by vague promises of future wealth. "If you could fog a mirror, you could go public," says David Golden of Hambrecht & Quist. Companies were floating at over 30 times revenue in 2000, compared to a long-term average of 5.8.

This time investors are paying more reasonable valuations for much more reasonable companies. As the Nasdaq's constituents started to produce earnings and investors became more cautious, valuations fell.

Today the index is on a price-to-earnings ratio of 21, compared to 100 in 2000. Applying that latter valuation to the index today would price it at around 30,000, says Alexander Eule in Barron's. The flotation frenzy has also died down: 53 tech firms floated last year, down from 371 in 1999. Today, while there is still froth around, Nasdaq 5,000 seems reasonable.

Recommended

Stockmarkets shrug off turbulence
Stockmarkets

Stockmarkets shrug off turbulence

Stockmarkets have hit their first bout of turbulence of the year, but most are clinging onto January’s gains.
4 Feb 2021
The FTSE 100 has clawed back above 7,000 – how much higher can it go?
UK stockmarkets

The FTSE 100 has clawed back above 7,000 – how much higher can it go?

The FTSE 100 index has risen to over 7,000 for the first time in over a year – it now sits just above where it was in 1999. But its era of neglect cou…
19 Apr 2021
The MoneyWeek Podcast: how to not lose money to inflation and financial repression
Investment strategy

The MoneyWeek Podcast: how to not lose money to inflation and financial repression

Merryn talks to Peter Spiller of the Capital Gearing Trust about how he navigated the last extraordinary year; what he's buying now; and how he plans …
16 Apr 2021
UK mid-cap stocks look forward to life after lockdown
UK stockmarkets

UK mid-cap stocks look forward to life after lockdown

The FTSE 250 hit an all-time high at the end of last week, as investors look to a post-lockdown recovery.
16 Apr 2021

Most Popular

“Joke” cryptocurrency dogecoin goes to the moon. What’s going on?
Bitcoin

“Joke” cryptocurrency dogecoin goes to the moon. What’s going on?

Dogecoin – a cryptocurrency created as a joke – has risen by more than 9,000% this year alone. Saloni Sardana looks at how something that began as an …
19 Apr 2021
Lab-grown meat: how “moo’s law” will drive innovation
Soft commodities

Lab-grown meat: how “moo’s law” will drive innovation

Jim Mellon and Anthony Chow, co-founders of Aim-listed Agronomics, explain why they believe that “cellular agriculture” will benefit from massive long…
16 Apr 2021
The bitcoin bubble will burst: here’s how to play it
Bitcoin

The bitcoin bubble will burst: here’s how to play it

The cryptocurrency’s price has soared far beyond its fundamentals, says Matthew Partridge. Here, he looks at how to short bitcoin.
12 Apr 2021