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celebrity investor kathy wood has called out how innovation stocks are facing growing backlash from investors and algorithms comparing them to the dot-com bubble of the early 2000s these same algorithms have had good success with this strategy and they have likened what we're going through right now uh to uh to the tech and telecom bubble and the bus but while algorithms and value investors see a bubble and are actively driving down the valuations for growth stocks like zoom cloudflare and teledoc by as much as 50 percent over the past few months kathy wood thinks this is a mistake the innovation that has been evolving and was accelerated coming out of the coronavirus crisis is unstoppable and is causing and will continue to cause explosive growth so according to her while prices may be high they are not high enough to account for the new value being created by these kinds of companies so in this video we're going to be comparing growth stocks today with dot-com bubble stocks from two decades ago looking at what similarities there are between companies like yahoo and pets.com with tesla or teledoc today and looking at what makes this current market different from that so by the end of this video you should have enough information to make your own decision will grow stocks keep going up or are we in the middle of the next dot com style crash so hit the like button if you want and let's start with some background on the dot-com bubble the year was 1999 the internet was just hitting its stride technology companies were everywhere and the biggest worry in everyone's heads was whether or not computers would stop working when the calendars switched from 1999 to 2000 in the dreaded y2k collapse but what people didn't know was that they were entering the largest stock market bubble of the last half century see the economy was hot and the employment rate was at an all-time high and companies like microsoft and apple had made headlines over the past decade as they quickly shot up from projects in a garage to fortune 500 companies and at the same time the unparalleled opportunity of the internet was starting to become clear with companies like a young amazon starting to sell items online or search engines like yahoo beginning to dominate web traffic it was in this environment that any company with a website a so-called.com company would immediately see its stock price surge as soon as they added.com to their name pets.com for example boasted a 400 million dollar market cap despite not having a product and really just owning a domain name in january of 2000 yahoo even became the most valuable company in the world at 125 billion dollars just by not having revenues anywhere close to justifying that and we all know what ended up happening to them but while it's easy to look back and call the dot-com bubble exactly what it was a bubble people at the time were recognizing the undeniable power of the internet from communications to shopping to use cases that they hadn't even thought up at the time investors were right about the internet's potential they just overestimated how quickly that potential would materialize but then that brings us to today where now the most valuable companies in the world are apple microsoft and alphabet the parent company of google and these companies that are valued much more highly than yahoo in 2000 with apple for example boasting a market cap of 2.87 trillion dollars versus yahoo's peak valuation at 125 billion dollars but while there are calls today that we might be in a situation similar to the dot-com bubble it isn't really with these behemoth companies this time instead it is with the growth-oriented retail investor loved innovation stocks like the ones held by kathy woods arc invest fund see over the past five years there's been a quiet revolution happening in the stock market that many people may not have even noticed happening and that is the advent of a new style of investing namely investing in ultra high growth high margin technology stocks that are introducing new technologies at a pace never before seen in the market we've seen stocks like zoom shoot up over 700 percent in less than a year we've seen companies like cloudflare grow their revenue at 50 per year for half a decade straight and then seen their stock price rise over twelve hundred percent in two years and we can't forget tesla whose price has risen well over two thousand percent in less than two years and made its ceo elon musk at certain points the richest man in the world what distinguished this new style of investing was a focus on the growth rate of companies and the future potential of the technologies they were introducing so it's really not surprising that the rise of innovation stocks has set off alarm bells for value investors after all it's a bunch of investors ignoring historical data for a new untested paradigm and the last time we saw explosive stock price growth like this was two decades ago during the dot-com boom where that word potential got thrown around a lot too but in addition to the rise in prices looking similar to the dot-com bubble there is one other major similarity between now and 1999 and that is the fact that these growth stocks have almost universally dropped in value often by as much as 50 or 75 percent similar to the early days of the dot-com crash we are seeing huge devaluations of these high-priced companies cloudflare for example one of my biggest holdings is down 50 percent from its peak in november 2021.
zoom is down around 80 percent from its peak while companies like tesla have fared slightly better at only down 15 and seeing as it took amazon one year from its peak in 1999 to its trough at down 90 percent in the year 2000 if we follow the same pattern with these growth stocks the drop we've seen so far is only the beginning and investors in these companies are going to face a lot of future pain but let's not get too ahead of ourselves after all there are some pretty big differences between today and 1999.
it's true that both stocks today and in the dot-com age are being valued at least partly on their future potential but that means very different things now than it did in 1999 as kathy wood points out because the valuations that people chased were simply based on eyeballs that might materialize and never did materialize uh we are nowhere near that situation now the sole focus in 1999 was the number of people who could potentially see your website regardless of whether or not you had a valuable product but in a lot of ways today we're seeing exactly what the dot-com companies would have loved to see real technologies creating real value we are living in the reality that that dream started and uh this reality has companies like you know teledoc has about 2 billion 2 billion in sales its revenues have gone up four-fold uh since the beginning of the corona virus rather than focusing on eyeballs we growth investors are looking at the explosive growth that is actually taking place in technology stocks right now yes their future growth is unknown but we do know that customers are clearly getting massive value today this comparison between the potential of the dot-com bubble and the reality today i think is really important the reason today feels so similar to 1999 might be because we're using the same language around companies today disruptive innovation future potential companies taking over the world but while that was all a gleam in the eye of the last bubble as kathy wood puts it we can all name companies that are changing the world all around us think of zoom with digital communications during work from home or teledoc providing virtual healthcare or tesla accelerating the advent of electric cars but to be fair while i can paint as rosy of a picture as i want there's one problem with everything i just said if these companies are actually creating incredible value and will continue to accelerate their growth why are their stock prices dropping well kathy wood has a theory for this she says that much of the market is dictated by algorithms run from the large hedge funds on wall street that basically look for patterns and company data to make trades and she points out how algorithms have been wrong in the past in early 2020 she called them out on their predictions in the early stages of the coronavirus when i was doing those videos we had algorithms and quantitative strategies and a lot of our stocks did not have big cash cushions and were burning cash especially in the genomic space and they were taken down by 75 percent many of them that 75 drop in genomics companies has a lot of parallels to what we're seeing today but kathy continued uh and of course that was the wrong answer the algorithms got it wrong and that there was a massive head fake uh caused a lot of consternation uh for the quantitative strategies out there so algorithms then greatly impacted the stock prices in the short term but they missed out on the underlying technological changes that these companies were driving and kathy wood clearly thinks the exact same thing is happening today the only difference is the algorithms have now changed and are looking at different metrics specifically valuations and inflation now we know that in an inflationary environment growth stocks tend to get hurt more than say value stocks that's just the rule of thumb and based on the cpi or consumer price index we are seeing significant inflation all around us but the algorithms big firms use today were built on data from the dot-com bubble and they seem to be treating current innovation stock valuations exactly like dot-com companies from 20 years ago this would account for the 50 drop in many stocks and for the corresponding rise in the prices of so-called value stocks like airlines banks and manufacturing but are the algorithms right well no one can say for sure kathy wood clearly thinks they are wrong pointing out how many stocks that are helping to digitize the world such as zoom and teledoc are being labeled as stay at home stocks because they did well during the depths of the pandemic that label of stay at home seems to imply the stocks will do poorly once people no longer have to stay at home and yet we're seeing the exact opposite even though now you could go to a doctor in person for a minor issue using teledoc might just be more convenient having a zoom call might make more sense than traveling across the country for a meeting and signing some documents with docusign might be easier than printing them and mailing them or worse meeting in person just to sign a piece of paper these aren't stay-at-home stocks they are digitalization stocks and any company that hopes to stay competitive going forward is going to need to use their services so that's kathy's position but at least on this topic i tend to agree with her i think we are in the middle of a temporary rotation toward value stocks that is completely misplaced why would i want to own stock in a legacy manufacturer that's making less and less money each year versus a high margin high growth stock that is creating technology that is changing the world yes some of the stocks are highly valued but if a company is growing at say 50 per year in one year at the same price they are 50 cheaper one year later they're 50 cheaper again so as long as we continue to see innovation and continued adoption of new technologies i personally am putting my bet more on innovation and growth stocks maybe the crash isn't over and like in the dot-com bubble we'll see some prices drop by 90 percent but in that case my focus will be on finding out which companies are like amazon in 1999 beat down but still fundamentally good companies and which stocks are pets.com selling a dream with no real substance but let me know if you agree with kathy wood on this or if you're more with the value investors and you think the rotation from growth to value should continue let me know in the comments and for a 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