Last year was a great one in which to be an investor. The S&P 500's (^GSPC -0.12%) 30% return was the best since 1997, and the tech-heavy Nasdaq Composite had an even better year, posting a 38% return. Unless you stuck all your money in gold, your portfolio is probably sitting pretty right about now -- and if you bought into some of the market's favorite tech stocks, you might feel like partying like it's 1999 all over again.
Of course, investors who remember the crazy times of 1999 can also testify to the lousy years that followed, especially if they were one of millions seduced by hot new tech stocks in the late 1990s. While we may never see such irrational exuberance in the market again, 2013 had its fair share of relentless hyperbole directed toward a few high-tech darlings. These stocks, which wound up being among the market's best performers last year, could prove the plaudits correct in the long run, or they might wind up stuck in a long-term rut as hype again fails to match reality.
Following is a collection of quotes culled from analysts who predicted huge returns in both 1999 and 2013, with identifying information stripped out. Can you guess what year they belong to -- or, even better, figure out (where relevant) which stock is being hyped? You'll find answers at the end of this article, but give it a try. You might be surprised at how similar 2013 sounds to 1999.
- "Many small investors are already catching on. They have ignored the dire warnings from professionals that have accompanied nearly every step of the Dow's rise. ... They are rejecting the outdated model that Wall Street has used to assess whether stocks are overvalued -- a model based largely on historical price-to-earnings, or P/E, ratios. That rejection reflects not their nuttiness but their sanity."
- "In a sense, we are actually at relatively low stock prices. ... So-called equity premiums are still at a very high level, and that means that the momentum of the market is still ultimately up. ... Price-earnings ratios are not hugely up. [The market has] gone up a huge amount, but it's not bubbly."
- "You can't say 'company is good, but stock is overvalued' so it will crash any more than you can say 'company is bad, but stock is undervalued' so it will go up. Technically, you can say these things, but you would be something north of wrong. Let's call it intellectually misguided. ... P/E ratios and other valuation metrics have become little more than gauges of investor confidence. The market has confidence in Jeff Bezos at Amazon.com; therefore Amazon stock rides high. The market has confidence in Yahoo! As such, Yahoo! stock rides high and will likely ride higher."
- "There's no denying that the Internet economy works by a different set of rules. ... When, in business history, have so many companies generated so much value so quickly? ... [Company X], a company that's [less than 10 years] old, has [many millions of] registered users and a market value of $35 billion."
- "[Company X] shares have moved from 20% overvalued to nearly 20% undervalued in just two months. We attribute the majority of the 35% retrenchment in the share price to a momentum/cult stock that produced 3Q results not strong enough to move expectations significantly higher. ... [Company X] can't be valued on near-term multiple metrics ... given that we expect [Company X] to multiply revenues by more than 10x [in four years and] by nearly 30x [in eight years] and around 60x [in 15 years]."
- "[Company X] is currently selling at more than 700 times its earnings for the past 12 months and 450 times its expected 1999 earnings. These are unprecedented valuations for a firm with this market value. ... If [Company X] in its 'maturity' sports a P/E ratio of 30 -- and this is a ratio that still anticipates substantial growth -- it will have to generate net profits of about [a whole lot] per year to maintain a [multibillion-dollar] market value."
- "[Company X] represents an appropriate way to invest in the long-term growth trends of wireless and data. ... Our 12-month price target ... implies 175x and 55x of our profit and revenue estimates [for two fiscal years from now], but is based on ... the present value of its royalty stream ... [and] 60x for its [high-growth segment] profits."
- "We are positive on [Company X's] ability to become one of the Web's leading utilities. ... [Company X] has displayed very robust growth in key metrics, and we have confidence that this momentum can continue as the company develops its advertising platform. What's more, [Company X] is one of the best plays off two of the biggest secular growth trends in the Internet space."
- "The company is projecting an increase [next fiscal year] of close to 90% growth. ... This is the kind of growth that brings equity holders large returns. I am assuming that [Company X] plans to continue with its current growth and momentum. The key is return on equity and return on investment. ... If [Company X] keeps its growth up at 90% per year, the stock could triple in the next two years. Stocks grow as companies grow, but managing debt and margins while increasing sales is the key to fast-growing stock prices."
Are you ready to learn who said what, when, and sometimes why? Look no further.
Answer key: 1999 or 2013?
1. James K. Glassman and Kevin A. Hassett, Dow 36,000, September 1999.
2. Alan Greenspan, interview with Bloomberg Television, October 2013.
3. Columnist Rocco Pendola, writing for TheStreet.com in December 2013.
4. Columnist Eric Ransdell, writing for Fast Company in its September 1999 issue. The company referenced was Yahoo!, which at the time was 5 years old and had 65 million registered users. Yahoo!'s market cap is barely 15% higher today than it was when the article was published, which represents a growth rate of just 1% per year since 1999.
5. Morgan Stanley analyst Adam Jonas, explaining his buy rating on Tesla Motors (TSLA 0.78%) in early December 2013.
6. Jeremy Siegel in The Wall Street Journal in April 1999, discussing AOL, which at the time sported a market cap of nearly $200 billion. AOL's current market cap is 98% lower than its 1999 level.
7. Paine Webber analyst Walt Piecyk, explaining his $1,000 price target on Qualcomm (QCOM -1.60%) shares at the end of December 1999. Adjusted for splits, Qualcomm's shares are less than 5% higher today than they were when Piecyk made his call, despite a 500% rise in revenue and a 2,000% rise in net income over the 13 years following the call.
8. RBC Capital Markets analyst Mark Mahaney, explaining his $60 price target on Twitter shares in December 2013.
9. Ben Brinneman of C Squared Trading, explaining his support for SolarCity (SCTY.DL) on TheStreet.com's Stockpickr subsidiary in October 2013.
Foolish final thoughts
It's tempting to believe that huge growth can continue forever. It's true that some companies can maintain strong growth for years or decades, but it's important to consider that at their current valuations -- Tesla is a nearly $20 billion company, Twitter is worth more than $35 billion, and SolarCity is worth $5 billion, even as none of them boasts any track record of profitability. There may be far less upside than analysts or ordinary investors might think.
It's a good thing that the market isn't as flooded with speculative tech stocks as it was in 1999, but that doesn't mean you can ride predictions of endless growth to a megamultibagger return quite so easily, either. Remember, in 1999, most investors thought that Yahoo! and AOL would lead the way for a new Internet age. While both are still in business today, they are considered also-rans to a certain ambitious search engine that wasn't even on investor radars in 1999. Can there really be such a thing as a "forever stock" in an industry where yesterday's superstar can still be swept aside by a few smart kids working out of a garage?