The dot-com boom began in 1995. At the time, the Nasdaq Composite Index was around 750…
And the tech-heavy index soared to more than 5,000 by March 2000. That’s a sixfold gain in roughly five years. Of course, some dot-com companies did even better than that.
But there was a big problem… Most of these companies were losing money.
You’ll likely recall now-classic flops like Pets.com, eToys, Kozmo.com, and UrbanFetch. They all tried to capitalize on the hunger for everything dot-com… And they all failed miserably.
One woman came to symbolize this era…
Today, she’s one of the top women in the investment and venture capital spaces. And she’s widely considered to be one of the top 100 most powerful women in the world.
But as I’ll explain today, she was the poster child for what happened on April 28, 2003…
The woman’s name is Mary Meeker.
During the dot-com boom, Meeker wrote “The Internet Report.” It became “the bible” for investors riding the wave of Internet-related euphoria at the time.
You see, at the time, Meeker was a star analyst for investment bank Morgan Stanley (MS). And in The Internet Report, she tracked a list of 199 Internet-related stocks.
These stocks had a collective market cap of roughly $450 billion in October 1999.
But at the same time, the combined annual sales of these companies only totaled $21 billion. Even worse, the 199 companies showed aggregate losses of $6.2 billion!
Despite the downright silly valuations, dot-com companies kept rallying until March 2000. That’s when the bubble popped…
Between March 10, 2000 and October 9, 2002, the Nasdaq Composite Index plunged from 5,048 to 1,114. That’s a drop of nearly 80% in about two and a half years.
Many of the 199 names on Meeker’s list simply went bankrupt during that time. And the media made it seem like she hand-picked them with the intent to deceive investors.
So when it all came crashing down in 2000, folks pointed their fingers at Meeker. In the eyes of the media and many investors, somebody needed to pay for the devastation.
Now, Meeker avoided charges herself. But as I alluded to earlier, she was the poster child of the movement that led to a massive settlement on April 28, 2003…
That’s when the U.S. Securities and Exchange Commission reached its punishment deal with Wall Street’s biggest banks. It’s called the Global Analyst Research Settlement.
In the end, Wall Street agreed to pay out more than $1.4 billion in fines.
The settlement was mostly for shoddy analysis. The big banks issued glowing reports on these companies. And investors ate it all up.
Folks, this is what happens when a company doesn’t earn enough to justify its stock price.
And more importantly, we’re seeing echoes of that today. The recent decline in tech stocks is happening because their fundamental revenue growth doesn’t justify their share prices.
Pandemic darling Peloton Interactive (PTON) fell from more than $160 per share to $14 per share in a year and a half. It’s a similar story for Zoom Video Communications (ZM), which has tumbled from about $570 per share to $84 per share. (And they’re both still falling.)
Big Tech is sinking, too…
Meta Platforms (FB), the parent company of social-media website Facebook, is down about 50% since last September. And e-commerce giant Amazon (AMZN) is down more than 40% from its peak last summer.
It took a full-blown market panic to remind investors that earnings matter. Heck, even after its steep decline over the past year, Amazon is still trading at nearly 66 times its earnings.
Don’t let Wall Street fool you into forgetting the fundamentals. And don’t ever forget April 28, 2003.
Good investing,
Carlton Neel
