From March 2000 through the beginning of 2001, the dot-com bubble began to burst. And lately, I’ve been hearing a lot of chatter lately about how this is 2000 all over again.
Specifically, on various financial news and commentary sites, I’m seeing multiple articles and comments comparing 2021’s “tech wreck” to the dot-com bubble bursting in 2001. Back then, emerging tech stocks were hit so hard many of them never recovered. Those that did found themselves on the mend for a decade-plus just to regain their 2000 highs.
Today’s pundits are drawing the conclusions as 2000’s “talking heads.” Basically, they’re saying that the tech/growth narrative hit its saturation point in 2020. Meaning that, even if they do “grow into their valuations,” it will take years for the stock prices to regain previous highs.
This is a mathematically flawed argument — the numbers simply don’t support this idea at all.
For starters, valuations in the technology sector were much more stretched back in 2000.
Back then, investors were bidding up unprofitable internet companies that were less than a few years old and which had no tangible assets besides cool domain names. Today, investors are bidding up world-changing technology giants that have been redefining how we eat, play, and work for years… and which are producing tons of profits every, single, year.
In 2000, the S&P 500 technology sector’s forward price/earnings multiple peaked around 50, while the rest of the index was trading around 20-times forward earnings. Today, the S&P 500 technology sector trades at about half that – 26-times forward earnings – while the rest of the index trades only narrowly lower at 21-times forward earnings.
See the chart below, borrowed from Yardeni Research.
Even further, this valuation premium in tech/growth stocks is warranted by bigger earnings growth prospects.
You see… back in 2000… growth companies were still mostly in the “idea phase” and didn’t have a great outlook for earnings growth over the next three to five years.
But… today… growth companies are mostly in the “action phase” and are ready to grow earnings like wildfire over the next three to five years.
So, sure, growth stocks are trading at 28-times forward earnings today, while value stocks are trading at 18-times forward earnings, but…
When you factor in growth and divide those earnings multiples by each segment’s respective earnings growth forecasts (to get the PEG ratio, or price/earnings-to-growth ratio), the “delta” disappears.
Value stocks have a PEG ratio of 1.44 today. Growth stocks have a PEG ratio of 1.49. They’re almost the same!
Compare that to 2000, when growth stocks had a PEG ratio of 2, which was nearly double value stocks’ PEG ratio of about 1…
What’s the big takeaway here?
All the talking heads are screaming about how richly valued tech/growth stocks are and how they’ll all come crashing down as rates rise.
When you actually dig through the numbers, you realize that premium tech valuations are warranted by significantly superior earnings growth… and once you factor that superior earnings growth in, tech stocks aren’t all that overvalued after all.
More importantly, they’re far, far short of being as richly valued as the dot-com companies of the 2000s.
It will not take tech stocks a decade to regain their early 2021 highs. In many instances, some of these stocks will be multiples higher in a decade…
Hydrogen fuel cell maker Plug Power (NASDAQ:PLUG). It looks richly valued today at 50-times 2021 sales estimates. But those sales are expected to grow by 50%-plus for the next decade, and by 2030, Wall Street sees the company earning $7 per share. Throw a basic a 20X multiple on that, and you’re talking about a $140 stock by the end of the decade.
It sits below $40 today… so if the estimates are right, then Plug Power stock will rise 250% or more over the next several years.
What about ad tech firm The Trade Desk (NASDAQ:TTD)? It also looks richly valued today at 27X this year’s sales estimates. But those sales are expected to grow by 20%-plus over the next decade, and by 2028, Wall Street sees the company earning $45 per share. Application software stocks like this have, over the past 20 years, averaged a 35X earnings multiple – which on $45 in EPS, implies a 2028 price target for The Trade Desk stock of nearly $1,600.
Shares trade around $670 today. So, there’s 135% upside potential here.
If you go smaller, you find bigger upside potential…
Look at e-commerce housing platform Opendoor (NASDAQ:OPEN). It’s a brand-new company with a small sales base and isn’t profitable. But Wall Street sees its disruptive tech as the future of real estate, and by 2030, the company is expected to earn $3 per share. Online retail stocks have averaged, over the past 20 years, a 35X earnings multiple – which, on $3 in EPS, implies a long-term price target for Opendoor stock of $105… that’s more than 5X the current price.
You get the point.
This isn’t dot-com bubble 2.0. The difference is that today’s companies have the earnings growth prospects to back up their big valuations.
All you’re seeing right now is a minor and short-lived valuation reset to adjust to higher interest rates. This reset will end. When it does, tech/growth stocks will bottom and reverse course sharply.
By this time next year, they’ll be back as the leaders of the market. By 2030, many of them will be multiples higher than where they currently sit today…
And you’ll be kicking yourself for missing out on these stocks while they’re still relatively cheap.
The aforementioned stocks are among my top stocks to buy. Long-term, these stocks will score investors big returns.
But there’s one stock in particular that is the best growth stock to buy today.
The best growth stock to buy today is a company that reminds me of a young Amazon (NASDAQ:AMZN). Indeed, I think buying this stock today could be like buying AMZN stock back in 1997 — before it soared thousands of percent.
Which stock am I talking about?
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.
By uncovering early investments in hypergrowth industries, Luke Lango puts you on the ground-floor of world-changing megatrends. It’s how his Daily 10X Report has averaged up to a ridiculous 100% return across all recommendations since launching last May. Click here to see how he does it.