Sometimes investment history really can be a guide to the future

Just two years after the tech bubble burst, people were expressing amazement at the prices some investors were willing to pay for stocks. So what should we make of those doing exactly the same today?


Kevin Murphy

Kevin Murphy

Fund Manager, Equity Value

Hindsight may be the investment equivalent of 20/20 vision but that does not mean investors are always willing to use what lies behind them to see what may also be in front of them.

To illustrate the point, let’s use an interview Sun Microsystems co-founder Scott McNealy gave to Business Week in April 2002, in which he highlighted the unrealistic valuations at which the company had been trading just before the dotcom crash.

“Two years ago, we were selling at 10x revenues when we were at $64,” he said.

“At 10x revenues, to give you a 10-year payback, I have to pay you 100% of revenues for 10 straight years in dividends. That assumes I can get that by my shareholders. That assumes I have zero cost of goods sold, which is very hard for a computer company.

“That assumes zero expenses, which is really hard with 39,000 employees. That assumes I pay no taxes, which is very hard. And that assumes you pay no taxes on your dividends, which is kind of illegal. And that assumes with zero R&D for the next 10 years, I can maintain the current revenue run rate. Now, having done that, would any of you like to buy my stock at $64?”

The question was clearly rhetorical because McNealy immediately continued: “Do you realise how ridiculous those basic assumptions are? You don’t need any transparency. You don’t need any footnotes. What were you thinking?”

Times were crazy then, what about now?

Just two years’ distance was sufficient to offer a great deal of perspective on the end of the tech boom – but, of course, those were particularly crazy times …

After all, when else would you find 133 stocks in the US Russell 3000 index trading at the eye-watering valuation of 10x sales?

And, yes, that is another rhetorical question because we will immediately continue by pointing out that, as of close of business on 23 April 2018, you could find 144 Russell 3000 stocks trading at that level.

Nor is this exactly a transatlantic issue because, while there may have been no UK stocks trading on a valuation of 10x sales in March 2000, as of close of business on 24 April 2018, you could find four examples in the FTSE All-Share: Auto Trader, Alfa Financial Software, Puretech and Rightmove.

All of which begs one final question – rhetorical or otherwise – just what would make it different this time?

Since we were highlighting discussions of a potential ‘tech bubble 2.0’ as far back as 2011 and 2012, here on The Value Perspective, this episode may need a new name.

Still, given how just two years after the original tech bubble, McNealy and others could look in amazement at what investors were willing to pay for stocks, should we not be able to ask of those who are willing to do exactly the same today: ‘What are they thinking?’

That is a question that really does need an answer.


Stocks mentioned are purely for illustrative purposes only and not a recommendation to buy or sell.


Kevin Murphy

Kevin Murphy

Fund Manager, Equity Value

I joined Schroders in 2000 as an equity analyst with a focus on construction and building materials.  In 2006, Nick Kirrage and I took over management of a fund that seeks to identify and exploit deeply out of favour investment opportunities. In 2010, Nick and I also took over management of the team's flagship UK value fund seeking to offer income and capital growth.

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