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Thursday 14 January 2021

North of Stupid

HotViews (and its predecessor HotNews) readers have long memories. This week I had several emails referring to my ‘NORTH of STUPID’ comment.

Back in Feb 2000 we were in the final days of the Dot.Com bubble. Sage was commonly referred to as THE UK’s Internet stock – even though only a small fraction of its SME users used the internet let alone used it for accounting. Sage share price had hit £10 which implied a P/E of 184. I was asked by the Financial Times for my views and they used my North of Stupid comment in the headline for the business section of that day.

Sage’s share price slumped thereafter to a low of 118p in 2002. It has NEVER hit £10 again and today opened at 554p implying a P/E of 19.

The question I was asked this week was whether we were once again in ‘North of Stupid’ territory.

The answer is rather more nuanced than in 2000. Back then ‘A rising tide had lifted all ships’ and the storm then sank them all. This time, that ‘irrational exuberance’ only affects certain stocks. Tesla is an obvious ‘North of Stupid’ candidate. Indeed I now hold no Tesla stock – although I’m sure the stock is still held by #ATT and, more significantly, #SMT. Outside tech, BitCoin seems an obvious candidate for the ‘North of Stupid’ label.

SHOther North of Stupid tech candidates are the many US IPOs in the last year – like Airbnb, Doordash, Snowflake etc. Indeed this madness continued yesterday when Affirm doubled its value to c$24b on its first day of trading on NASDAQ. Affirm had revenues of $510m and losses of $113m in its last FY.

This latest North of Stupid situation has even spurned its own get-rich-quick vehicle – the SPAC or Special Purpose Acquisition Company. A SPAC is a shell quoted company that raises funds then goes in search of acquisitions- news of which sends the shares soaring. Nikola – the hydrogen-powered truck company that was seen as a Tesla rival is, perhaps, the best example. Despite huge losses and NO revenues it managed to achieve a market value of $25b. Despite a disastrous run of bad news (like GM scrapping its partnership with them) Nikola is STILL valued at $6b.

Then we come to the other tech companies. I still contend that most Big Tech companies are reasonably fairly valued given their profits, revenue growth and cash generation. That is even more so in the UK which, bluntly, probably still undervalues its leaders like Computacenter. I have oft-said, however, that because tech is now so firmly engrained in the economy, a global or local recession is bound to affect tech too.

I do believe that the value of the ‘North of Stupid’ bubble stocks will indeed burst. But whether it will take down ALL TECH, as it did in 2000, is the real question.

Footnote – You might like to read my articles for Dec 1999 – Mar 2000 in the lead up to the Dot.Com Bubble burst.

Either read them all at Archives of IT - System House Archive or a precis from HotViews of 2009.

Posted by: Richard Holway

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