Strong performance from tech stocks has rekindled memories of the dot-com bubble and the resulting crash that struck at the turn of the millennium.
US internet stocks have again been among the strongest performing areas of the market; Netflix has risen 1507% over the past five years, while Facebook, Amazon and Alphabet are up by 477%, 355% and 226% respectively.
Then there´s Tesla, a technology orientated car manufacturer that´s seen its share price rise by 977% over the same period.
Does this all mean investors have become a little over exuberant for everything that is new and shiny? Or are these big share price rises somehow justified?
Tech shares as jam tomorrow
Tech shares are typically thought of as “jam tomorrow” investments. In the earlier years, such firms should be expected to necessitate high levels of investment in R&D.
Investors who get in early can stand to make spectacular returns, but may lose all if the technology or business model is unproven. On the other hand, investors risk overpaying if they put their money in a tech stock that has already skyrocketed on seemingly early successes.
If the technology and business model does stack up, another major problem could be competition. Barriers to entry are therefore important; what´s to stop a competitor from muscling in and taking all the spoils?
Resources for growth
Internet video streaming name Netflix is one of the best-performing stocks in the market this year, having risen by around 50%. There are some similarities with Amazon in the general way that Netflix has sought to execute its business strategy.
Runaway subscriber growth has been propelling the stock higher, but Netflix insists on aggressively reinvesting in the business with the hope of boosting profits in future years.
Amazon, meanwhile, has seen its profits significantly beat expectations this year, after having run the business at a breakeven point for virtually all its history, as it ploughed available cash into expansion.
At 230 times earnings, Netflix´s valuation in P/E terms appears rich to say the least! It is a classic jam tomorrow story in that it can only hope to justify its lofty share price if it manages to grow earnings by multiples in future years.
Even after the earnings successes of this year, Amazon´s P/E multiple also appears rather lofty, at 194 times.
Not all tech stocks command such incredible P/E multiples though. The Dow Jones US Technology index currently has a P/E multiple of around 24 times, just modestly higher than that of the broad US blue-chip S&P 500, which trades at 22 times.
Alongside Amazon, the other two biggest internet companies in the world are Facebook and Google parent Alphabet, which have P/E ratios of 41 and 33 respectively.
A screaming buy?
In comparison to some of the US internet names, Apple appears to be a screaming buy at a valuation of just 18 times earnings.
Much of Apple´s growth in recent years has been propelled by the phenomenal success of its iPhone, which accounts for around two thirds of its revenue. There´s plenty of excitement surrounding the imminent launch of its iPhone 8.
Further down the line, there is the question as to whether Apple will be able to maintain its growth momentum, especially as it has become quite reliant on the iPhone. The smartphone market is highly competitive.
Apple´s sales have risen by over 100% since 2011, while its share price has advanced by 76% over the past five years.
Estimates suggest Apple´s 2017 fiscal year revenue will hit $226bn, before growing another 13% to reach $255bn by 2018. The following year, however, growth is expected to have petered out with sales forecast to come in at around the $258bn mark in fiscal 2019.
Loss-making electric car manufacturer and sustainable energy company Tesla encapsulates why investors are so often drawn to technology focused companies.
Rapid sales growth underpinned by shiny new technology means investors are hoping that ongoing innovation and the growing popularity of its products will enable the company to eventually turn healthy profits.