Ultra-Speculative Investments Are Making Some Rich But Can This Last?

Bulls would argue that low interest rates, the advent of new technologies and the need for automation create the conditions that help sustain stretched valuations.

However, things were strangely similar back in 2000: declining interest rates, the Taxpayer Relief Act of 1997, a supportive FED and the Telecommunications Act of 1996 helped boost investor optimism and drove technology stocks to unbearable valuations.

Here is what CNN Staff Writer David Kleinbard wrote on November 9, 2000:

“The collapse of the Internet bubble, perhaps one of the largest financial fiascoes in U.S. history, came after a three-year period, starting in January 1997, when investors would buy almost anything even vaguely associated with the Internet, regardless of valuation. Investors ignored huge current losses and were willing to pay 100 times expected earnings in fiscal 2002. They were goaded by bullish reports from sell-side securities analysts and market forecasts from IT research firms, such as IDC, Gartner and Forrester Research.”

“Stocks that skyrocketed north in a fashion never seen before will plummet south in a fashion never seen before either," Bengston added. "A lot of companies that don't have path to profitability or a leading position in their market will be shut down rather than receiving second or third rounds of funding.”

BENCHMARK’S TAKE

  • On the bright side, the Adobe, PayPal, Facebook, Apple and Microsoft of this world have proven that technology can be a highly profitable business. These manage to sustain relatively high growth rates while producing high cash flows while keeping capital expenditure low
  • However, valuations of many money-loosing but high-growth businesses are still stretched, even after a prolonged decline that started in February of 2021

Disclaimer

Please note that this article does not constitute investment advice in any form. This article is not a research report and is not intended to serve as the basis for any investment decision. All investments involve risk and the past performance of a security or financial product does not guarantee future returns. Investors have to conduct their own research before conducting any transaction. There is always the risk of losing parts or all of your money when you invest in securities or other financial products.

Credits

Photo by Ben Lambert on Unsplash.