The Next 'Dot-Com Bubble' Might Be on the Horizon

Joel Litman

The 'dot-com bubble' is a catchy name... but it's a misnomer. 

While the term is commonly used to reference the 2000s economic hiccup, it doesn't accurately describe what happened.

In fact, a lot of the wealth created and destroyed between 1998 and 2002 had nothing to do with speculative dot-com companies.

You might remember early Internet companies like, which managed to go public at $11 per share in 2000 before it even figured out how to make money. The company famously sold pet supplies online for less than it paid to get those supplies.

Less than a year later, was defunct.

Those are the most memorable stories. They're what people think of when they hear about the dot-com bubble.

However, the true culprits of the economic slowdown were the much more viable, well-established telecom-equipment players.

Telecom companies boasted grossly overconfident valuations in the late 1990s and early 2000s.

Cisco Systems (CSCO) was a prime example of extreme market optimism. As more stuff moved online, companies that built the physical bones of Internet infrastructure soared.

At its peak in March 2000, Cisco's market cap reached $555 billion – a level it has never come close to since. Once the bubble burst, its stock fell more than 80%, wiping out hundreds of billions of dollars in value.

Valuations got so crazy because of massive investment from telecom companies in the late 1990s. Some of this investment came as a result of Y2K. Some of it was because of expectations for increased Internet demand and digitalization of businesses.

Said another way, valuations soared because growth was so strong. Stocks were rising like that growth would last forever.

Eventually, folks realized that this wave of investment had an expiration date. When that happened, valuations deflated.

Telecom businesses could no longer afford to grow at the same rate. Laying fiber optics and new communication grids is expensive. Without the necessary cash flows, these companies were forced to slow down.

We might be seeing the same thing today – with different players...

This time around, it isn't the telecom companies looking like the Monopoly man with their pockets turned inside out. It seems like venture capital ("VC") spending is hurting tech earnings.

A slew of Big Tech companies including Amazon (AMZN), Google parent Alphabet (GOOGL), Intel (INTC), and Microsoft (MSFT) have been riding a wave of sustained demand to rising valuations for the past three years.

This demand was initially boosted by what we call the "at-home revolution." People were stuck at home during the pandemic. They became more dependent on tech services than ever.

But that was only a portion of what boosted earnings for Big Tech. The real driver for things like Amazon Web Services ("AWS"), Google Cloud, Microsoft Azure, and Intel's chips has been VC firms with near-unlimited budgets for these projects.

These firms spent money freely in order to build scale. Profits weren't the main priority in the immediate future. Now, they can't afford the luxury of time.

With interest rates rising and funding rounds vanishing, VC firms have to make tough decisions. If they can't get to profitability anytime soon, growing revenues is no longer the only priority.

That's why they're now desperately rushing to cut costs.

Without limitless VC budgets to fund growth, Big Tech is rapidly disappointing investors...

Plenty of folks think this is an opportunity to "buy the dip." We're a little more cautious.

Back in 2000 to 2002, Big Tech companies lagged the rest of the market as it recovered. These stocks stayed below their all-time highs for a long, long time following the so-called dot-com bubble.

We might be seeing the same thing today. Big Tech could be dead money for a while as valuations come back down to Earth.

Shares of some of the biggest names in the sector have plunged following disappointing earnings. And with interest rates continuing to climb, it doesn't look like they've found their bottom yet.

Of course, not every tech company will underperform. There are still specific businesses that can fare well in this environment.

But you might want to focus your money elsewhere for the time being. The tech sector likely has plenty of room to fall from here.


Joel Litman
November 7, 2022