Think back to the late 1990s when Amazon only sold books. When Yahoo was the largest search engine. When Pets.com was worth more than a billion dollars. This time is now known as the Dot-com Bubble and it taught us a big investing lesson: do not let your eagerness to invest in a company overshadow that company’s sustainability.
In the late 1990s, companies with the slightest mention of “dot-com” in their names experienced skyrocketing stock prices as everyone was eager to invest in a dot-com company. Investors cared more for the number of visitors these websites received than the profits they were actually making, which was fortunate for many companies because very few made any profit. The euphoria over the values of these companies made many tech millionaires overnight, but it was only a glorified game of musical chairs. Investors in tech rarely invested in a sustainable company that made profits, so once the music stopped, there was nowhere left to go.
Amazon’s stock and the NASDAQ, an American stock exchange, fell by 91.8% and 77.9%, respectively, according to Bloomberg Finance. Pets.com went bankrupt after failing to bring customers online. The mix of soaring prices and a lack of profits left investors feeling sorry they ever thought of investing. Fast forward to present time, and many associates the Dot-com Bubble with the tech start-ups in the Silicon Valley.
Soaring technology company stock prices, however, are not based on the same type of euphoria seen during the Dot-com Bubble. Large technology companies with prolific returns in recent years are viable businesses that have created what is called a moat. A moat is an advantage a company has that would require a competitor to have a substantial amount of money to compete with. For example, Google has a moat because of the vast amount of data it has collected from its search engine, browser, email, mobile operating system, etc.. This gives them an advantage because advertisers can easily target prospects using this data. According to the SEC’s EDGAR database, Google’s revenue and profit in the three months ending on March 31, 2018, was approximately $24.75 billion and $5.4 billion, respectively. The moats on technology stocks do not guarantee that the stock prices will keep going up, but they do provide evidence that the underlying foundation of that business is strong. If you pair a strong company with a reasonable valuation compared to the stock market, you have a good investment candidate.
At Fogel Capital Management, we are constantly researching companies with moats that are reasonably priced, so that we can ensure our clients are not investing in “unicorn” companies. We take a look and analyze companies’ data in order to see if they will be strong in the coming years. We place great emphasis on understanding these companies’ financial background and pride ourselves in our comprehension of these types of stocks for our clients. Call us today at (772) 223-9686 for a free portfolio consultation.