''Is the situation really developing like during the dot-com bubble in 2000?''
Will the fact that the ‘’big five’’ IT giants in the USA fell in value in one day by almost $100 billion lead to catastrophic consequences?
World attention has recently been riveted on the news that the ''big five'' largest American technology companies — Facebook, Amazon, Apple, Microsoft and Alphabet, the owner of Google (FAAMG) — unexpectedly fell in value at the end of trading by nearly $100 billion. This caused serious concerns among investors. Maybe, a wave of startups has led to a new ''technology bubble'' akin to the dot-com bubble of the 2000s? Should they prepare for that it will burst? In the newspaper column written specially for Realnoe Vremya, Vice-President of the Russian-Tunisian business council and an IT entrepreneur Elbrus Latypov writes about danger degree of the situation and answers to the question: will the fact that the ''big five'' IT giants of the USA fell in value in a day by almost $100 billion lead to catastrophic consequences?
Has the wave of start-ups lead to a new ''bubble''?
In June, Apple shares fell in value by 3,88% to $148,98 with the capitalization of $774,86 billion just in a day (as noted by The New York Times, for Apple it was a serious failure for 14 months), Alphabet shares — by 3,41% to $949,83 with the capitalization of $665,57 billion, Microsoft — by 2,27% to $70,32 with the capitalization of $539,61 billion, Facebook — by 3,3% to $149,6 with the capitalization of $438,07 billion, Amazon — by 3,16% to $978,31 with the capitalization of $467,7 billion.
The first thing that comes to mind: has this wave of startups lead to a new ''bubble''? Is the situation really developing like during the dot-com bubble in 2000? Or even worse? As you know, in the late 1990s, venture capitalists became very interested in the Internet and invested a lot of money in companies that subsequently burst. However, in my opinion, now we see a different situation, which is more like a temporary correction, as over the past year the ''big five'' sharply increased its capitalization by $660 million, which is equivalent to the total GDP of Hong Kong and South Africa. Let's try to understand this situation, having studied the experts' opinion.
The founder of The Bahnsen Group David Bunsen believes that these companies are ''just plain overbought'' and that ''they are extremely stretched from a valuation standpoint''. At the same time, The New York Times reported on the rising investors' concerns about valuations of technology companies — capital investors as well as Bahnsen agree that the companies can be overvalued.
''If the market starts to erode, it will happen very quickly''
Analysts of one of the world's largest investment banks Goldman Sachs note that the rapid growth of the technology sector ''has built a valuation air pocket''. Talks about a new technology bubble have long been raised. ''The market of Internet technologies is overheated, investors overvalue startups, and soon a bubble will burst and everyone will be affected, and it will be worse than the dot-com crash at the turn of the century,'' not only sceptical analysts but also some entrepreneurs believe.
It should be noted that the market decline began just after the publication of Goldman Sachs's study, where they drew parallels between the technological ''bubble'' of the 2000s and the situation with the five largest IT companies in the US. Analysts of the investment bank are alarmed by concentration of securities of these companies in the composition of the portfolios of mutual investment funds, reaching, according to analysts' estimates, 11,8% of the total volume of their investments. Among key reasons for this phenomenon Goldman Sachs calls the desire of managed funds to diversify their investments, reducing the share of companies, directly dependent on the economic situation in the US and the fed's policy. The reverse side of such actions can be a collapse of the market in case of profit taking as a result of negative factors appearance.
Experts of the credit institution assumed that players in the market may underestimate risks associated with investment in the shares of the companies FAAMG. The irony is that the investment Bank Goldman Sachs has become such negative factor.
''All you need is a spark. Everything has gotten pretty expensive, multiples are very high. It doesn't take much to get a decline started,'' said Stephen Massocca, senior vice president at Wedbush Securities in San Francisco. Phil Blancato, head of Ladenburg Thalmann Asset Management in New York, is more pessimistic in his assessment. He believes that investors should be ready to make a sale if the momentum changes, if this market starts to erode, the process will be very quick.
''Behind these figures there is the claim of these companies on dominance in the new era, which they create''
There are different opinions on ''overvaluation'' of the ''big five'', but in general all technology companies generate sustainable cash flow. That is, unlike companies like Uber, they generate real profit, not just inflate capitalization. Of course, some ''inflation'' is present — the value of real assets of companies is sometimes ten times less of market value. But it is rather a problem of not companies themselves but the organisation of stock exchange itself as a tool for speculative trading.
Moreover, in the next decades, there is no particular alternatives to the ''big five'' FAAMG because the information and technology sector is gaining in importance and opens up new opportunities such as Big Data. Big Data is called a new era in the post-information age, when not information itself will have the value (its channels of its receiving are already mastered) and not even a way of processing it but turning it into some specific products. In other words, materialization of information, its acquisition of particular forms. In general, changes in social communication, economic model and political system. The ''big five'' have already accumulated petabytes of data of literally every person on the planet who uses the Internet and devices created by these companies.
Nathan Rothschild said a famous phrase that determined development of the information sector: ''Who owns the information, he owns the world''. Undoubtedly, no matter how these companies were overvalued, the power over the minds of people that they have is difficult to overestimate. It is unlikely that we will see some fundamental change in the position of these companies in the medium term. In the short term it is possible, but that's another story. The figures of their capitalization are just numbers on a computer screen. Behind these figures there are more fundamental things, as well as the claim of these companies on dominance in the new era, which they create.