Kevin Muir of the MacroTourist blog says we’re not quite at “2000-level-of-stupidness,” but he posted this chart to show we’re getting pretty close:
As you can see from the illustration, the number of stocks in the Russell 3000 RUA, +0.04% that are trading for 10 times revenue is closing in on the peak hit during the peak of the internet bubble.
For some perspective on what that metric means in terms of valuation, Muir revisited this 2002 quote from Sun Microsystems CEO Scott McNealy, who addressed it in what amounts to a dot-com autopsy:
‘At 10 times revenues, to give you a 10-year payback, I have to pay you 100% of revenues for 10 straight years in dividends. That assumes I can get that by my shareholders. That assumes I have zero cost of goods sold, which is very hard for a computer company. That assumes zero expenses, which is really hard with 39,000 employees. That assumes I pay no taxes, which is very hard. And that assumes you pay no taxes on your dividends, which is kind of illegal. And that assumes with zero R&D for the next 10 years, I can maintain the current revenue run rate. Now, having done that, would any of you like to buy my stock at $64? Do you realize how ridiculous those basic assumptions are? You don’t need any transparency. You don’t need any footnotes. What were you thinking?’ Scott McNealy, Business Week, 2002
Muir says that Sun, a darling of the bubble days, was “priced so far beyond perfection that it was head-shakingly-stupid.”
Soon after reaching that $64 level McNealy mentioned, the stock would drop well into single digits on its way to being bought by Oracle ORCL, -0.25% for the relatively paltry sum of $7.4 billion in 2009.
So, is the stock market starting to overheat like it did back during the dot-com heyday? Muir isn’t ready to sound the alarm just yet.
“In my mind, it still doesn’t feel anywhere near as frothy as 2000,” Muir said. “Yet, I need to acknowledge that numbers don’t lie, and according to this metric, we are only a few ticks away from equaling ‘DotCon’ stupidity.”
Late in Thursday’s session, the Dow Jones Industrial Average DJIA, +0.07% was up almost 100 points, while the S&P 500 SPX, +0.00% and Nasdaq Composite COMP, +0.05% were also moving higher.
