The internet bubble of the late 1990s and early 2000s culminated in one of the greatest market collapses in history.
After notching unprecedented gains throughout the duration of the 1990s, investors doubled down on risky tech stocks and pushed their valuations to stratospheric levels. Fundamentals were eschewed in favor of spiffy marketing pitches and pipe dreams.
It didn't matter that some of the companies hitting the market didn't have revenue or viable business plans. All that mattered was that the company was associated with the internet in some way, shape, or form, and had a name ended in "dot-com."
Mark Yusko — CEO and CIO of Morgan Creek Capital Management, where he oversees $1.5 billion — sees inklings of a similar situation brewing today. And he's not shy about sharing his thoughts on the matter.
"We've got this tech bubble 2.0," he said in an exclusive interview with Business Insider. "Everybody's talking about: 'Oh it's different this time because we've got things like blockchain technology, and we've got cloud computing, and all these great TAMs (total addressable markets).'"
But Yusko isn't buying the hype. He's seen cheap capital, compelling stories, and emotions drive valuations into no man's land once before. And although history rarely repeats itself in financial markets, it does often rhyme.
"The interesting thing today is that valuations are worse than 2000 in some areas," he said. "The valuations got so crazy because there was the free money created by the Fed, and people took that free money and bought what was moving."
Yusko cites the period in the late 1990s where the Federal Reserve pumped about $500 billion into the economy as fears over Y2K mounted. He says that stimulus found its way into small-cap stocks and tech stocks, which created an asset bubble of epic proportion.
To Yusko, a notorious cohort of early-2000s internet stocks provides historical context.
"Back in 2000, you had Cisco — which was the poster child — trading at 286-times earnings," he said. "C-I-M-Q — Cisco, Intel, Microsoft, Qualcomm — were considered the fab four and there was not one sell recommendation for any of those four stocks in March of 2000."
In short, these stocks were grotesquely overvalued, yet not one prominent Wall Street analyst would issue a sell recommendation. When opinions are that one sided, it generally means a sharp reversal is in order.
He continued: "Here we are 20 years later, and that basket of four stocks is still negative."
Today, Yusko thinks that the Fed's stimulative policies are having a similar effect. Valuations are widely disconnected with fundamentals. A tell-tale sign that investor exuberance is starting to take over and that another bubble is brewing.
"Zoom is my favorite to pick on," he said. "Perfectly fine company, perfectly fine product, but you can't pay 65-times sales and make money."
For context, Zoom (ZM) is currently trading at 43-times price-to-sales, 2,522-times price-to-earnings, and 26-times price-to book. From a fundamental analysis viewpoint, this valuation is about as ludicrous as they come and almost makes Cisco's 2000 valuation look normal.
This excessive pricing action leads him to believe that the likes of Zoom and a select few cloud computing companies could fall 90% in value and still be expensive.
"There are cloud computing companies selling at 20 and 30 and 40-times revenue," he said. "That's a bubble."
But that's not the worst of it, at least in Yusko's mind.
"Here's a crazy, crazy stat," he said. "Since 2013 — so we're talking a little over five and a half years — the S&P is up a little over 100%, but FAANG is up 700%."
Much like the C-I-M-Q cohort of the early 2000s, FAANG — Facebook, Amazon, Apple, Netflix, and Google — have led major indices higher. In fact, they make up about 15% of the S&P 500. If appetite for these firms slows down — much like it did in the early 2000s for CIMQ — it could spell big trouble for the rest of the market.
Although Yusko is certain we're in a bubble, he's quick to note that pinpointing its eventual demise is impossible.
"I don't know when this bubble is going to pop, but I do know it is going to pop," he concluded. "It's much better to be three hours early than a minute late."