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Is the Crash in Tech Stocks Over or Are We in a Bubble?

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U.S. tech stocks are among the best-performing asset classes in 2020 even though many analysts have raised concerns about their valuations. Analysts have drawn parallels with the dot-com boom in the 1990s when tech stocks soared and crashed later. The tech-heavy Nasdaq 100 is up 29 percent for 2020 despite the economic crisis amid the COVID-19 pandemic. However, tech stocks have come under pressure over the last week. The stocks have fallen sharply from their recent highs. Is the crash in U.S. tech stocks over or could they crash again? Also, are U.S. tech stocks in a bubble?

Tech stock crash in 2020 versus the dot-com bubble

The Nasdaq 100 index made a closing high of 12,420 on Sept 2. Based on the closing prices on Sept. 14, the index is down 9.2 percent from that level. On Sept. 3, the Nasdaq 100 tumbled 5.2 percent. Last week was the worst week for the index since March. As tech stocks fell, memories resurfaced of the crash that we saw in the dot-com bust. Are there any similarities between the rally in tech stocks this year and what we saw in the late 1990s?

Tech stocks are different in 2000

The rally in tech stocks in 2020 isn't strictly comparable to the dot-com boom days. First, U.S. tech companies are among the most profitable companies in 2020. In July, Keith Lerner, the chief market strategist at SunTrust Advisory Services, refuted the possibility of a bubble in tech stocks. He listed some very intriguing data points. For example, the Nasdaq trades only 22 percent above its long-term price trend versus a 280 percent premium in 2000.

Also, while the weightage of tech stocks in the S&P 500 is the highest since 2000, their profitability is also commensurate. The top five tech companies contribute 22 percent to the S&P 500’s cash flows, which is in line with their weightage in the index. When tech stocks crashed in the dot-com bust, the fall was aggravated by the fact that most of those companies didn't have real business models or revenues. In 2020, tech companies have strong business models. The companies are rising in anticipation of an increase in the pace of digitization.

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Source: istock

Is there a bubble in tech stocks?

Currently, tech stocks' valuations are quite high but nowhere near the dot-com days. However, that doesn't mean that there isn't a bubble in some tech stocks. The electric vehicle industry is a good example. Tesla stock is up over 400 percent for the year. Many times, the stock has rallied for reasons that don't make a fundamental difference. Tesla stock soared 70 percent after it announced the split.

Tech IPO boom

Many tech companies are coming up with their IPOs. Tesla and NIO have issued shares twice in 2020 to raise capital. In Tesla’s case, CEO Elon Musk categorically denied the possibility of a capital raise during the earnings call for the fourth quarter of 2019. Earlier this month, the company raised another $5 billion by issuing shares. The offering was immediate even though Tesla said it would be staggered.

The wave of tech IPOs suggests that there could be pockets of a bubble in U.S. tech stocks. In the July Bank of America Global Fund Manager survey, a record 74 percent of fund managers said that U.S. tech and growth stocks are the most overcrowded trade

The crash in tech stocks seems to be over at least for now. If there's another crash in tech stocks, it could be an opportunity to add quality tech companies to your portfolio. Tech stocks have a positive outlook even after the COVID-19 pandemic ends.  

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