2 reasons this crash in tech stocks is not the dot-com bubble 2.0

Many are calling this latest wave of tech stocks the second coming of the dot-com bust of the early 2000s. And to be honest, there are legitimate reasons to compare.

Margin levels have increased last year very similar to what we saw in 1999, and recently small tech stocks have seen their prices drop by as much as 90%, unlike two decades ago. If you live in an internet bubble, there’s probably a lot of emotional scar tissue that makes you believe it’s all over again.

The fear is understandable—many new tech stocks didn’t recover from market crashes in the early 2000s. But despite the apparent similarities, I see two very important differences that lead me to believe that this crash will not go the way it did two decades ago.

In 2000, the Internet was uncharted territory.

“What is the Internet anyway?” You may remember the joke. In the year Adapted from Bryant Gumble, 1994.

In the year That’s what the stock market tried to answer until the bubble burst in 2000. It was clear that the Internet was a big deal, but no one really understood how it would change society. The market was valuing dot-com stocks as if the advent of the Internet had completely changed how the world did business. As it turns out, the forecast was right, just not the timing.

Investor interest in all things web-related has led to thousands of new businesses popping up and going public as quickly as possible — many with no plan on how to make money. In fact, a 1999 study found that 1 in 12 Americans (or 8 percent) are at some stage of starting a business. For some context, nearly five million Americans — or 1.5% of the population — will apply to start a business in 2021, according to data reported by the White House.

In the year In 2000, the Internet was an exciting new technology that few understood. This has led to an incredible amount of enthusiasm from investors, as well as founders starting companies that are small and have no basic business models.

While you may argue that this is happening with crypto recently, this simply isn’t the case with the broader stock market.

Today, technology companies are more profitable.

The surge in investor interest in Internet companies has created a paradox for many startups. They realize that they can simply spend their way to additional funding (as opposed to, you know, actually selling something for a profit).

The name of the game was product awareness. For example, six months after its launch, online airfare marketplace Priceline.com (now called Reservation of holdings) spent $20 million on advertising, all while losing money on tickets sold.

This high advertising spend is designed to capture as many Internet eyeballs as possible. As these companies get more clicks, they get more funding from venture capital (VC) firms. In other words, they were pushing their way to higher prices and often extending their losses. And the VC firms reinforced this, because they were only concerned with ensuring profitability after the IPO (ie, selling the stock for a profit after it went public).

When you look at technology stocks today, there are certainly some that are happening (cf RivianPre-Income IPO). But in comparison, growth stocks are more profitable today than they were 20 years ago.

Amazon And AlphabetIn the year

Data by YCharts.

And it’s not just the giant industries that make money. Magnify relationships, Veeva Systems, PubMaticAnd Pinterest It’s the small tech companies (and countless others) that make real profits today.

This is in stark contrast to 2000, when very few Internet companies were making money.

You can’t ignore the basics

No doubt overhyped valuations have driven valuations to ridiculous levels thanks to government stimulus and the pandemic, but the fundamentals are different now than they were in 2000.

Internet companies filed for bankruptcy during the dot-com bubble, because they didn’t have solid business models, just ideas. Therefore, when investor sentiment turned negative, these companies were unable to obtain the additional funding needed to sustain their operations and quickly suffered losses.

Today’s technology companies are more likely to offer real products and services that provide tangible value, and many are doing so at extremely high profit margins.

Of course there will be some companies that don’t make it out of this bear market, but I don’t see a widespread collapse of tech companies like in the past.

If that’s the case, the tech companies whose shares have taken a big hit this year could offer excellent long-term returns for investors buying at today’s prices.

John McKee, CEO of Whole Foods Market, a subsidiary of Amazon, is a member of the Motley Fool’s board of directors. Alphabet CEO Susan Frey is a member of The Motley Fool’s board of directors. Mark Blank on Pinterest, PubMatic, Inc. and has positions in Zoom Video Communications. The Motley Fool has positions in and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Booking Holdings, Pinterest, PubMatic, Inc., Veeva Systems, and Zoom Video Communications. The Motley Fool has a disclosure policy.