As an observer of the economic scenery, I've watched with great fascination as the world has transitioned from one era to another. Each transformational epoch carries its unique markers, and we find ourselves, once again, in a time of dramatic evolution. The world is buzzing with chatter about a sharp upturn in NASDAQ, fuelled by a palpable excitement around Artificial Intelligence (AI). Commentators are raising their eyebrows in concern, their fingers pointing back at the dot.com bubble and whispering, "Remember what happened back then?"
However, before we dive headlong into this conversation, let's take a step back. Most of this consternation appears misguided. While it's not my intention to weigh in on the over or undervaluation of a particular stock, there's an argument to be made about the maturity of the current Information Age revolution. It's crucial to understand the context and nuances that differentiate the dot.com era from today's burgeoning AI revolution.
The dot.com bubble was all about promise and potential, with minimal delivery to back up the grandiose projections. However, hindsight reveals that many budding technologies from that era did deliver and, indeed, exceeded expectations in the subsequent decades. Today, the Information Age revolution is far more mature and is moving rapidly into its third phase. This latest phase trails the PC-based revolution of the 1980s and 1990s and the consumer digital revolution of the last two decades. Today, the spotlight shines on disruptive areas such as cloud computing, AI, automation, sensors, and 3D printing.
What does this mean for the tech sector? Some of the biggest winners of the second phase are still enjoying high profitability. Furthermore, newer businesses in these burgeoning fields are yielding returns on equity (RoE) at an increasingly rapid pace. As we delve deeper into the rabbit hole of the Information Age, the rate of disruption escalates, but so too does the payback.
A reflection of this evolution can be seen in the stock market multiples. Unlike the peak of the dot.com bubble, NASDAQ is not trading at a staggering 100x plus. Instead, forward multiples are closer to 30x-35x, with the S&P 500 (SPX) growth styles trading at approximately 20-25x forward. In comparison, the value style hovers around 16x-17x, with the premium being no more than 20%-30%. Is this a reasonable premium?
To answer this question, one must consider the recent rise in neutral rates, attributed to heavy fiscal spending in 2020 and 2021. Is this a permanent shift or merely a temporary deviation? Those who argue for permanency have yet to clarify what demographic, technological, or productivity arguments would justify keeping neutral rates significantly higher compared to the consistent decline observed over previous decades.
Our world remains deeply, if not irreversibly, addicted to financialization and debt. Additionally, we have to grapple with negative demographics and extreme inequalities. To further complicate matters, the Information Age, fuelled by applications like ChatGPT and other AI technologies, is poised to significantly disrupt white-collar employment. Parallelly, sensors, robotics, and 3D printing are set to revolutionise manufacturing and logistics. In my view, the ‘secular stagnation’ theory is alive and well, albeit with higher volatility. In a disrupted world with constrained growth opportunities, should investors pay a premium for companies driving the disruption? For most, the answer is an emphatic 'yes.'
With today’s environment rhyming with everything from Black Monday, through the dot.com bubble, to the Global Financial Crisis (GFC), I know how tempting it can be to argue that history repeats itself. However, we must resist this temptation. There are instances when the pace of change accelerates exponentially, and we are living through one such moment. The choice lies before us: join the revolution or become one of its victims.
Our current technological landscape differs significantly from the dot.com era in its maturity and delivery capacity. Rather than writing off the current tech valuation excitement as just another bubble, it's prudent to acknowledge the transformative potential of the technologies being touted. After all, we are not merely speculating about the future – we are already living in it. And as we continue down this path, the payback could be more significant than many can imagine.
So, to those casting a wary eye on the present and fretting about echoes of the dot.com bubble, I say this: remember, each era carries its own markers. Let's learn from the past but also embrace the promise of the future. Because the Information Age is not a bubble waiting to burst, but a balloon expanding into space, ready to take us to places we've yet to imagine.
