Financial journalists are rarely treated like rock stars. Readers eagerly await the views of Goola Warden and Assif Shameen in The Edge Singapore every Friday. But they do not generate the hysteria that the Beatles enjoyed when they landed in New York in 1964. Some fans had queued at the airport for days.
However, there is one financial journalist whose views commanded rock star-like attention. Jack Willoughby published a cover story for Barron’s on March 20, 2000, titled Burning Up. He feared that the dotcom bubble had no substance.
Willoughby wrote: “When will the Internet Bubble burst? For scores of ’Net upstarts, that unpleasant popping sound is likely to be heard before the end of this year. Starved for cash, many of these companies will try to raise fresh funds by issuing more stock or bonds. But a lot of them won’t succeed.”
Willoughby’s piece was prescient in the extreme. The Nasdaq index hit a high 10 days before the Barron’s cover story. A year later, the Nasdaq had fallen 60%. It took 15 years to recover its losses.
Willoughby had studied 200 Internet companies for the piece. He found that most of them would exhaust their cash by the end of the year. The list included companies that were then prominent, but now forgotten. Netzee, CDnow, Pets.com and eToys were like what Netflix and Amazon are today.
By the late 1990s, dotcom startups were listing and doubling on the first day of trading. The Nasdaq had risen five-fold by the spring of 2000 in five years. This is double the rise in the last five years.
Willoughby saw a flaw in their business model that the market was blind to. The dotcom companies were spending too much on advertising and promotion. Also, the dotcoms were losing money by selling at an unsustainable discount.
Pets.com was a supplier to America’s pet owners. It listed in February 1999 at a valuation of 11 times sales. The company was famous for its mascot, a sock puppet of a cute dog. The puppet was even interviewed on a talk show.
Pets.com lost money every time it sold a product. The pet supplies like cat food were priced at a third of its cost. It was also spending US$158 in operating expenses for every customer that it acquired.
Webvan.com, an online grocer, was in an even worse position. None of its executives had been in the grocery field. It showed, as it burnt its IPO proceeds within eight months of its listing.
The Nasdaq has doubled since March. It has been powered by the pandemic. Tech businesses like e-commerce and social networking have been boosted by Covid. The boom has come close to home. Sea, a Singapore-based tech group listed in the US, is trading at 37 times sales. The loss-making retailer is up five-fold since March and has almost twice the market cap of DBS Group, the largest company on the Singapore Exchange.
Jeremy Grantham, the founder of GMO, an asset manager in Boston, sees danger. He expects the tech bubble to pop by the middle of the year. He sees parallels between 2000 and today’s situation. He says that in all bubbles, the last leg sees an acceleration.
As evidence, he cites the sheer number of IPOs. In 2020, there were 480 IPOs, compared to 406 IPOs in 2000. The number of small-cap companies that have tripled in price is triple that of the previous high.
Grantham may be barking up the wrong tree. These are powerful anecdotes, but they do not mean that the bubble will burst soon. The average price/sales multiple of the Nasdaq 100 is five times, which is 30% below March 2000 levels. Amazon is at only 3.5 times FY2021 sales.
The cash burn is not a problem today. The tech stocks have been opportunistic in raising equity. The companies have used the exuberant stock markets like a cash machine. At its current burn rate, Amazon has enough cash to keep going indefinitely. Amazon’s smaller challengers have followed suit. Sea has risen five-fold since March last year. In December, Sea raised US$2.7 billion ($3.56 billion). Its cash burn of US$1.4 billion in FY2021 will be easily met.
Willoughby was on the money in March 2000. He deserves his cult-like following. But, this time, it is different.
Nirgunan Tiruchelvam is head of consumer sector equity at Tellimer (Exotix Capital)
