Tech Boom

How to avoid a second dotcom crash

home24
Enjoy it while you can, tech stocks. Source: Imago / Hannelore Förster

People with long memories – or empty pocketbooks – may still remember the bubble that preceded the dotcom crash in 2000, when companies with no earnings and no business model saw their stock inflated to insane prices. Germany, despite its cautious reputation, was no different: When the bubble burst, stocks on the Neuer Markt, then Germany’s leading tech stock exchange, lost 98 percent of their value within three years – close to a total wipeout.

Today, on both sides of the Atlantic, records are falling once again in a prolonged technology stock boom. Yet it wouldn’t be right to call this a new bubble – especially in the United States. Newly-hyped tech companies are racking up huge earnings and making serious profits. Technology currently pulls in more money than any other branch of industry, so it’s only fitting that the Nasdaq, New York’s technology index, is rising faster than the overall stock market.

The rediscovered love for growth stocks – tech stocks above all – has also pumped Germany’s new technology index, the TecDAX, to record levels. Over the past 12 months its value has jumped by a quarter, while the blue-chip DAX has been largely treading water. Go back further and the progress is even more stunning: The TecDAX’s value has tripled in the past five years, and grown seven-fold since the spring of 2009.

The problem is that the Nasdaq and TecDAX are not at all comparable: The Nasdaq contains real global companies, mega-earners which are collectively worth more than $10 trillion. By contrast, the TecDax is small beer. Last year, the collective earnings of the 30 companies making up the index amounted to just €2.6 billion. That’s what Apple earns in a single month on iPhones alone.

Pump up the index

After the dot-com bubble, tech stocks were profoundly mistrusted for many years. It was only when hotshot new economy firms like Apple, Google, and Facebook began to make big profits – along with old new tech like Microsoft, Cisco and Intel – that investors returned to the technology sector. The dotcom stigma gradually wore off, replaced by a new tech mystique fed by the likes of new emerging giants like Amazon and Tesla. Disruption is the new name of the game, and the contemporary behemoths are credited with revolutionizing entire economic sectors.

Germany may have taken longer to join the party, as skepticism of tech stocks – and stocks more generally – was far more deep-seated. But investors here too have slowly come around. On Friday it was the turn of online furniture retailer Home24 (pictured above), which made its market debut at a price of €28.50, about one quarter above its issue price. And then there’s online payments platform Wirecard, which has seen its shares triple in three years and 160 percent in the past year alone, giving it a market value of €18 billion. That’s within reach of Deutsche Bank, valued at €20 billion. The big difference: Wirecard has a price-to-book ratio of more than 10; Deutsche Bank reaches a paltry 0.3.

Money also keeps pouring into the wider TecDax, pumping up small stocks from companies that no one has ever really heard of. Specifically, many investors are using exchange-traded funds (ETFs) and index funds to buy a stake in the whole TecDax index, knowing nothing about the companies that make it up. The result is that anyone who invests in a TecDAX ETF today will spend 32 times as much as these companies earn (see graphic). That ratio is at 25 for the Nasdaq and just 13 for the good old blue-chip DAX.

That’s where things start to feel a bit dotcom-boomish: worries are growing that too much money has poured too quickly into these small, low-earnings companies, dangerously inflating their market value. Christian Kahler, chief investment strategist at DZ Bank, doesn’t see an immediate end to the boom, if only because such global trends tend to be self-reinforcing. He advises existing investors to hold their shares. But he doesn’t advise any new investments in the index, either. Shares on the index are “very, very expensive,” he warned.

Genuine heavyweights to the rescue

Deutsche Börse, the stock exchange operator that owns the TecDax, is well aware of the danger and has decided to make a radical change to the index. From September on, the TecDax will expand to include very large, well-established technology companies, including SAP, Siemens and Infineon.

For the first time, German companies will be listed on more than one index, as is already commonplace in the United States. Some of the TecDax’s new arrivals are genuine heavyweights: SAP alone has a market capitalization of €129 billion ($150 billion), significantly more than the entire value of all 30 current TecDax companies.

The big benefit is that investor money will be distributed among a far wider range of companies, including some very large ones. This should help stabilize prices and values, lessening the chance of a major crash. Let’s just hope nothing happens before this bright idea is implemented in September.

Ulf Sommer reports for Handelsblatt on companies and financial markets. Christopher Cermak and Brían Hanrahan adapted this article for  Handelsblatt Global. To contact the author: sommer@handelsblatt.com

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