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Has the tech bubble burst?

Are we about to see another dot.com crash?

Gordon PapeBy Gordon Pape, Editor and Publisher

Despite the ravages of the pandemic, 2020 turned out to be a good year for U.S. stocks. All the major indexes hit record highs, despite the fact that many major sectors suffered heavy losses, including energy, banks, airlines, real estate, and hospitality.

In a normal year, those declines would have been enough to drag the indexes into the red. But 2020 was no normal year. The dazzling performance of the technology sector almost single-handedly turned what should have been a dismal year for the markets into a winner.

One number tells the story. The Nasdaq Composite gained 43.2% last year. No one else was close. The S&P 500 finished up 16.26%, the Dow advanced 7.25%, and the S&P/TSX Composite gained a paltry 2.17%.

Some analysts warned that the tech sector was overbought, but the surge continued into the early part of 2021. On Feb. 16, the Nasdaq Composite hit an all-time high of 14,175.12 in intraday trading. Since then, despite a few short-term rallies including a up-tick on Friday, the trend has been down. At the close on Friday the index stood at 12,920.15, down over 1,250 points or 8.9% from the February high.

Investors are rightly asking what happens now.

Are we about to see a repeat of the dot.com crash?

It began on Monday, March 13, 2000, after Nasdaq had hit a new record the previous Friday. By the time it was over in 2002, the index had lost almost 80% of its value. It took 15 years for Nasdaq to regain its 2000 high.

The major difference, of course, is that in 2000, most of the dot-com companies were start-ups with no earnings. It was a Wild West show as everybody was fighting to control a share of a new technological breakthrough known as the internet.

Today’s leading technology companies are well financed and hugely profitable. They include Microsoft, Amazon, Alphabet, Facebook, and Apple. But there are still many high-priced firms that are only marginally profitable or are operating in the red. These pricy high-flyers including cyber security firm Palo Alto Networks, medical communications company Teledoc Health, streaming platform provider Roku, and DocuSign, which provides software for remote document signing.

Many of these companies are taking a pounding right now. As of Friday’s close, DocuSign was down about 33% from its all-time high, reached less than a month ago. Teledoc Health has dropped 38% in the same time frame. Roku is off 27%. Shopify has lost 25% in four weeks, despite the fact it’s now profitable. Zoom, which also makes a small profit, is down 43% from its October high.

By contrast, Alphabet (Google) is down only 2.2% from its high. Microsoft is off 5.9%. Facebook has lost 13.3%, Amazon 15.5%, and Apple 16.3%.

In short, it is the newcomers whose prices ran way ahead of themselves that are leading the tech sector down. That’s the same story as in 2000. What we don’t know yet is whether the big players are going to be dragged down with them. So far, they’re faring much better, but will that hold?

One person who does not believe we’re heading into a new dot.com crash is Michael Clare, vice-president of the Brompton Group and manager of the Brompton Tech Leaders Income ETF (TSX: TLF).

“Tech still has a ton of running room,” he said during a recent webinar on the sector. “There is a lot of strong fundamental growth to come. This is much different from 2000-2002 on many levels, including profitability and cash flow.”

Although the pandemic accelerated the transition to technology by 5-10 years, he still sees strong potential in many areas. They include hyperconnectivity (5G, the internet of things), cloud computing, semiconductors, and artificial intelligence, which he calls “a massive opportunity for investors”.

As the manager of a high-performance tech fund, it would be surprising if Mr. Clare were anything but bullish on the sector. But his arguments make sense. We’ve barely scratched the surface when it comes to investing in such tech sub-sectors as 5G, artificial intelligence, and blockchain. As he puts it: “There’s tons of runway for growth opportunities.”

But it may take a while to get there. The market is socking investors who overpaid for stocks that offer breakthrough technology but minimal to negative earnings. We’re in the midst of a tech correction and it probably isn’t over. I don’t expect another dot.com crash but I do expect more pain as the market finds a sustainable level.

One piece of good news to take away from this: some good quality tech stocks with a bright future are now back in reasonable buying range.