Some Other Lessons from the Dot Com Era

In my post Is Tech Investing in this Decade Similar to Investing in Emerging Markets in the Last Decade, I explained that the host of the show triggered me to see the similarity between how we perceived innovative growth companies today and how we perceived emerging markets in the past.

Let us continue with that discussion today.

I think if we were able to review certain details in the past, we would have realized a lot of the past do resemble today.

There are enough bears that substantiate their case by showing us the similarities between this period and the dot com bubble. Yet there are also enough commentators pointing out that the technology companies today are very different from your Pets.com.

Akram from the podcast reminded us that the 1990s is not short of innovation that changed the way we live very much:

• HTTP, HTML, JAVA, The USB
• Windows 98, MP3 player, DVR, DVD
• Hubble space telescope, email, text message, instant messaging
• Playstation, human genome project, genetically modified food
• Mass adoption of mobile phones, Pentium processor, plasma TV
• Ecommerce and the search engine

I am sure that some of these were discovered much earlier but the pace of adoption and development sped up during that period.

There were some things we do not remember about the 1990s

Akram from the podcast shared that we remembered that period as a nasty investment episode. The period was defined more about Pets.com and Webvan. These were massive failures.

Or we remember the companies that were around today such as Microsoft.

This is a newspaper cutting of the winners of the 1990s if we start measuring from the start of 1st Jan 1990.

The big winner was Dell and EMC. The 10-year percentage gain was sick. They were legendary compounders.

But today, the only winner that we probably remember was Microsoft.

Dell and EMC have been combined into a single entity today.

The best performing stock in 2000 was Green Mountain Coffee but if we want to rank Green Mountain Coffee in this gain chart they would be behind Microsoft.

What can we learn from this with the companies today? Dell, EMC, Microsoft wasn’t able to maintain this crazy growth rate. They weren’t even able to maintain a growth rate that is 10 times less.

It does make you wonder if we are too optimistic that in order for some of these companies today to be fair value, they have to sustain their growth rates for a very long period of time. Are we being conservative in estimating their growth rate?

Management of Tech Stocks Couldn’t See the Slowdown Coming

Stocks are valued based on their cash flows in the future.

The guidance given by management gives analyze and investors an idea about the business outlook going forward. If the guidance is shit, a company that has the majority of its cash flow far into the future is going to get slaughtered.

Cisco’s CEO John Chambers was still very, very bullish six months after the dot com bubble burst. He was still projecting 50-60% growth for years to come.

We see no indications in the marketplace that the radical Internet business transformation in practices like customer service, supply-chain management, employee training, empowerment, and e-commerce that is taking place around the world today is slowing — in fact, we believe it is accelerating globally,

John Chambers in Aug 2000

Cisco was able to deliver close to 60% revenue growth for the next 3 months. Even as growth slowed for 2 quarters, they were forecasting a return of 40-50% growth.

In the next decade, the actual growth rate was 7% a year.

Basically, competition, capacity forecasting were all wrong.

Here is another commentary from another tech CEO:

We are off to our fastest start in six years,” said Oracle CEO, Larry Ellison. “The spectacular growth in our database business demonstrates that we are continuing to take market share from IBM and Microsoft. The world’s largest Web sites — from Amazon.com to Yahoo! — rely on the Oracle database to handle huge numbers of users and enormous quantities of information. The Oracle database is the software that powers the Internet.

Larry Ellison in Sep 2000

Siebel System (this was the star CRM back in the day) CEO Tom Siebel after 111% revenue growth in 2001:

Market conditions for our products appear to be robust heading into 2001,” Siebel said. “We see no evidence of budget cuts or declining demand from our customers. In fact, we see spending increasing substantially mainly because we are perceived as a safe buy in these challenging economic times.

Jan 2001

The takeaway is that results and outlook by management were positive even after the market has peaked in hindsight.

We are not saying this time will also be similar, but it does make you question how easy is it to predict long term growth for the next 5 years. Bear in mind that cloud computing has not really experienced any formal recession yet.

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