Tuesday 4 July 2017 3:30 pm Schroders Talk

How many of Amazon’s peers from the dotcom boom exist today?

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I’m an author on The Value Perspective blog and a fund manager on the value team at Schroders. Prior to joining in 2015, was responsible for the UK research process at Threadneedle. I began my investment career as an analyst in 2001.

In March 2000, a US financial magazine listed Amazon among 207 unprofitable listed internet businesses, most of whom had worryingly small cash reserves.

More than four-fifths no longer exist.

“Investors must never forget that for every tech start-up success story, hundreds of other such businesses will have failed.”

So we wrote on our Value Perspective blog earlier this month as we marked the 20th anniversary of Amazon, one of the biggest tech start-up success stories of them all.

Just in case anyone thought we were exaggerating, however, perhaps we ought to put some numbers around that opening sentence.

To do so, let’s travel back in time to March 2000 – a point that, with hindsight, we might see as the ‘b’ of the bang as the dotcom bubble that had inflated throughout the late 1990s burst.

The peers that have fallen

It was also when Barron’s, a leading US financial magazine, published a list of all the unprofitable internet companies that had gone public – most of whom were burning through their cash reserves at a deeply disturbing rate.

Ranked in order of how little time they had till they ran out of cash, the list ended with Israeli cybersecurity company Radware, which at the time had more than eight years’ worth of cash in the bank and is still very much a going concern.

In contrast, at the top of the list was internet hosting firm Pilot Network Services, which had apparently already run out of cash and went out of business in April 2001.

Nor was it alone in suffering this fate. Of the 207 unprofitable dotcoms in the Barron’s list, only 33 – just 16% – are still around as independent entities today.

Of these, only 20 (9.7%) have made any sort of positive return over the last 17-odd years and only 14 (6.8%) can boast a return that has managed to beat the broader market in any way.

Your return on investment

As a result, if you had decided back in March 2000 to invest £1,000 across all 207 companies on a market capitalisation-weighted basis – that is, proportionally, according to their size – your investment would be worth £1,004.10 today.

It seems unlikely you would feel your return was worth the rollercoaster ride you took.

Mind you, if you had chosen to invest your money equally across all 207 companies, you would have done even worse, seeing your £1,000 drop in value to £576 or – if for some reason you had forgotten to buy Amazon – just £322.

By way of comparison, as the following chart shows, the broad MSCI World index would have turned your £1,000 into £1,346 over the same period.

Investment performance since March 2000

Source: Schroders, Barron's list, Bloomberg as at 15 June 2017. Past performance is not a guide to future performance and may not be repeated.

All of this of course involves an element of hindsight but, for what it is worth, Amazon – whose 10 months’ reserves of cash in March 2000 placed it 45th in the Barron’s list – has averaged a return of roughly 20% a year, albeit with some alarming share-price falls along the way.

Still, while it was one of the four largest companies on the list, you should not make the mistake of thinking size was any guarantee of success here.

Of the three other companies that were of a comparable size to Amazon back then, content delivery network Akamai Technologies may be doing very nicely but internet hosting service Exodus Communications declared bankruptcy in 2001.

For its part, software provider Ariba was bought by German software giant SAP in 2012 – an outcome that perhaps reveals a small but by no means fatal weakness in our analysis.

From which the main conclusion you should probably draw is that – no matter the market noise, the hype and the excitement that surrounds a particular company or industry – you just do not know what the future holds.

In March 2002, almost all of the 207 companies in the Barron’s List must have thought they had a wonderful and profitable future ahead of them but, as it turns out, almost none of them did. That is no exaggeration.

Important Information: The views and opinions contained herein are those of Andrew Evans, Fund Manager, Equity Value, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. The sectors and securities shown above are for illustrative purposes only and are not to be considered a recommendation to buy or sell. This material is intended to be for information purposes only and is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. The opinions in this document include some forecasted views. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee than any forecasts or opinions will be realised. These views and opinions may change. Issued by Schroder Investment Management Limited, 31 Gresham Street, London EC2V 7QA. Registration No. 1893220 England. Authorised and regulated by the Financial Conduct Authority.