FLASH FRIDAY is a weekly content series looking at the past, present and future of capital markets trading and technology. FLASH FRIDAY is sponsored by Instinet, a Nomura company.
November 20, 2001 was the final nail in Enron’s coffin.
The company’s earnings report, released 24 years ago this week, validated concerns that the former high-flyer and market leader was a fraud, and the stock, already a shell of its former self, dropped 23% to $7 per share.
Per Begin to Invest’s This Day in Stock Market History: “The report was bad. The company was insolvent, with only $1.2 billion in cash to cover $2.8 billion in immediate liabilities. The accounting fraud, the lying, the coverups…it was all catching up to Enron and its executives. Congress was beginning to entertain the idea of a hearing on Enron, bill collectors were calling, and analysts were bombarding the company with questions.”
Enron lost its stakeholders billions, as did WorldCom when it fell under the weight of its own accounting scandal one year later.
But there were bigger costs. Both companies had been market leaders and endorsed, or at least approved, by regulators, analysts, auditors, and pundits, and their spectacular and seemingly out-of-nowhere collapses fed the broad market decline (the Nasdaq Composite fell a breathtaking 78% between March 2000 and October 2002) that damaged investor confidence for years.
Why is this story relevant now?
Hopefully, it’s not. But there is a connection that the turn of the century saw some lofty market valuations for internet firms, and today’s market sports lofty valuations for AI and big tech firms.
We’re not balance sheet or corporate governance experts, but most everything we hear and read from the majority of reputable human sources is that today’s market leaders – e.g. Nvidia, Apple, Amazon, Meta, Alphabet et al – are high-quality companies with high-quality earnings, run by high-quality management teams. No black boxes or shady off-balance sheet financings have been revealed, though whispered concerns are getting louder about Nvidia’s accounting, and the so-called circular revenue within the AI complex.
So the risk of some kind of big-company blowup seems very low. But didn’t it seem also that way in 1999-2000?
We put the question to our AI overlords and they seem to agree that we’re safe from an Enron or WorldCom part deux.
“The current high valuations are a cause for caution, but strong fundamentals differentiate them from past market bubbles,” was the response.
AI makes the case that today’s market leaders generate strong earnings with growing revenue, as well as good profitability metrics and healthy balance sheets; leadership in major secular growth trends such as AI; and differentiated business models.
“The general consensus is that a correction (a significant, but temporary, drop in value) is a possibility, but a complete ‘blowup’ in the style of the 2000 dot-com bust is less certain due to the underlying strength of the businesses.”
Let’s hope “less certain” is more like “extremely unlikely”.
