March 10, 2000 marked the peak of the dot-com bubble. Almost to the day 21 years later, a new tech bubble is in the process of bursting. The peak of the current NASDAQ-bubble occurred on February 9, while the 2020 Corona-trough had its one-year anniversary on March 23rd. If we want to know whether we are in a bubble yet again, we need to examine its characteristics.
While the specifics vary, there are many similarities between the tech bubble over 20 years ago and the one that we may be in today.
- Unproven business models
One of the reasons why SPACs have been so active in the M&A space is because they take public companies without profits that would find going public to be be quite difficult otherwise. For example, helicopter ride sharing may be cool. But it’s far from clear that it will ever be a viable business, if only due to the energy inefficiency of rotor-based levitation compared to the highly efficient lift of fixed-wing aircraft, whose efficiency beats even that of land-based transportation for longer distances.
- Overly optimistic market size projections
The top 5 car manufacturers (Toyota, Volkswagen, Ford, Honda, Nissan) have a combined market share of about 1/3 of the worldwide car market. Their combined market capitalization is around $200bn. We find it hard to imagine a scenario for market share and margins in which a valuation of Tesla of over $800 bn could be justified. There simply aren’t enough car buyers in the world, even when you account for additional business lines that Tesla may have. A similar calculation can be made for the market size and pricing power of Covid-vaccines, as we wrote in January.