Back in 1999/2000, there were two kinds of bubble stocks – those that had earnings with proven business models like CSCO, INTC & MSFT, and those that had healthy losses but sold the promise of the future like AMZN, PCLN & YHOO. Of course, I picked stocks that all still exist. The irony is that while both groups traded at obscene multiples, the latter group’s was not really comparable since any earnings multiples were derived from different denominators. What is interesting is that the latter group still trades at a higher multiple than the former due to the lingering pixie dust associated with web business vs stodgy ol tech.
While many internet stocks remain range bound and well off of their all time highs, last week INTC and MSFT attempted to show signs of their past bubble lives. INTC assaulted levels not seen for ten year on the heels of their better than expected Q3 and a solid second half sales outlook. The chart of INTC over the last 15 years is quite fascinating, and what many forget is that many of these stocks nearly doubled from the end of 1999 before the gig was up in Q3 2000 before giving up almost 80% from the all time highs:
MSFT on the other hand had less of a parabolic move from the end of 1999 to the highs in 2000 and actually topped out much sooner than INTC. The 15 year chart below shows MSFT’s within striking distance of that last push higher in the internet bubble:
Obviously there is little comparison possible of these companies on a valuation basis. Both have retired hundreds of millions of shares over the last 15 years, paid billions of dollars of dividends and have employed small cities throughout it all. While the tech behemoths are no longer the domain of nimble innovation, they do what they do well – make chips and software – and they’ve survived over decades as a result.
At this juncture, the enthusiasm for MSFT and INTC is likely due to the same enthusiasm that has spurred the utility sector to the top spot in 2014 – perceived defensiveness. Neither company has made any groundbreaking strides in the past couple of years. While the PC cycle has turned in their favor, that has occurred before in the past decade, but was not enough to lead to clean breakouts as has happened this time around. The long-term competitive situation remains difficult for both companies, but investors have decided that they are willing to pay up for the stocks since they are more attractive on a relative basis (compared to the overall market) than they have been at most points in the past 10 years.
In short, the rally in the tech behemoths might say more about the broader market’s situation than about the business situation at the companies themselves. Investors continue to be interested in “safer” stories, whatever the cost.