2nd Quarter 2019 Commentary
The most damaging stock market event of this generation may have been the unprecedented 3-year collapse of the Internet Bubble. Technology stocks dominated the market with the highest valuations ever before witnessed – though, in the moment, these seemed entirely reasonable to most investors. A measure of the damage: the S&P 500 returned 14.7% a year in the last 10 years; but over the last 20, since December 1999, only 5.9% – that’s been the 2-decade return for someone invested at that time.
But what if the Internet Bubble never really ended? The number of people on the internet today is 18x greater than it was then. On the back of that extraordinary rise, the technology sector is again the highest weight in the S&P 500. But that doesn’t include mis-labelled companies whose premium (some would say unsupportable) growth rates and valuations depend on continued expansion of internet usage: Amazon.com is classified as a Consumer Discretionary company; Facebook and Google are in Communications; the country’s largest cell-tower and cloud server data centers are listed in Real Estate. Add it all up, and one-third of the value of the S&P 500 is now in internet beneficiary companies.
Seems normal enough, again, yes? Except for one thing. Internet usage growth is about to face limits that cannot be avoided. The early edges of those limits are already appearing. As that unfolds, the normalization of profit margins and valuation multiples of these market leaders, from Apple to Microsoft, even to a level well above that of the average company, will, for those who did not get to witness the first Internet Bubble collapse, provide a front row seat.