Capital Ideas

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Technology & Innovation
Are tech stocks in for bubble trouble?
Will Craig
Equity Investment Analyst

A near-term correction for tech stocks is a distinct possibility, says investment analyst Will Craig. Here he offers his longer term outlook for the internet sector.

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Matt Miller: Some folks will say they look at the preeminence of these handful of big tech firms today — even given the kind of incredible dynamics you’ve talked about — and their minds swing back to the late 1990s, when tech led what seemed like a bubble and then there was a bust. Are we headed toward that now, or is this a different era in your view?

Will Craig: I would say valuation multiples are high, both for the market and particularly for the internet sector. And so I think in the short term, it’s certainly very feasible. You could see, potentially, a very significant correction.

That being said I, I think if you look out longer term — I would say five years or longer — I will be very surprised if the internet doesn’t continue to meaningfully outperform the broader market. And I’d point out that this really is different than the magnitude of the valuation at the time of the dotcom bubble. Specifically, in August of 2000 the IT sector was 34% of the S&P 500 valuation, whereas as of this spring it was only 23%. So —

Matt Miller: Very different.

Will Craig: Yeah, so IT makes up a third less of the market than it did 17 years ago. And that’s actually kind of incredible when you consider that most of these companies weren’t making money 17 years ago. And to think that the internet actually was kind of a niche technology 17 years ago, and it wasn’t so integral through all of our lives in the developed market. And I think this ties in with why I believe internet will do better than the market over the long term. What I’m implicitly saying is I think the 23% of IT that’s in the S&P 500 today, I think that’s going to go up closer to, maybe even ultimately above, the 34% where it was 17 years ago.

Matt Miller: And that would just reflect the kind of natural evolution of the economy and the role of the kind of different businesses . . .

Will Craig: Yeah.

Matt Miller: . . . being the intermediary for global commerce, I guess, whatever the right phrase would be.

Will Craig: I think it reflects that, in my view, we’re still relatively early innings in the digital analog to the Industrial Revolution. And we may be one or two innings into it, in my opinion, but I still think it’s early. And it’s just, when you go across these verticals and you say it’s still only one of 10 retail purchases online. It’s still only a third of ad dollars online. It’s still only half of travel reservations are booked online.

And it’s hard for me to imagine a world where in 15 to 20 years, the vast majority of all — with the possible exception of retail — where the vast majority of all those categories aren’t online. That’s literally going to be trillions of dollars flowing online, in many cases at very high margins. And I think increasingly we are going to see internet and software companies capturing more and more of the economic value in supply chains of all industries.



Will Craig covers U.S. small- and mid-cap companies as an equity investment analyst. He has 13 years of experience and holds an MBA from Stanford and a bachelo's in Asian studies from the University of North Carolina. 

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