Why the Nasdaq 5,000 is Different This Time
At the dawn of the new millennium, sock puppets and “burn rates” were all the rage. It seemed all a company needed to do was add an “e” to the front of their name or a “.com” to the end to pull in investments. However, companies like Pets.com, despite clever commercials, failed completely.
Today, earnings matter. In a slow-growth world, investors generally favor industries and companies that have the potential to deliver solid earnings, not just because they’re trendy. Mature tech is a good example because, as I’ve mentioned in other blog posts, it is poised to benefit from the pro-cyclical environment and an expected increase in capital expenditures.
Let’s take a look at five things that have changed in the last 15 years:
1. The Nasdaq Composite Index itself looks very different now.
Y2K: Tech reached as high as 65% of the index, and telecom was 12%.
Today: Tech represents 43% and telecom is less than 1%, offering more diversified exposure with other sectors.
2. Dominant names are different. In fact, only three of the top 10 stocks, based on market cap, remain the same.
Y2K: Apple, which had just introduced a basket of fruit-colored iMacs, was not even among the 10 largest Nasdaq stocks. And its market cap was around $22 billion.
Today: Apple is the most valuable company in history at more than $750 billion as iPads and iPhones are everywhere you turn.
3. New entrants have come on the scene.
Y2K: Mark Zuckerberg would have been applying for a driver’s license.
Today: Facebook is a household name globally and one of the largest companies in the world by market cap.
4. Strong earnings growth helps keep valuations attractive.
Y2K: Earnings were nonexistent for many Nasdaq companies, and according to index data its price/earnings ratio at times exceeded 200 through multiple expansion.
Today: Nasdaq stocks currently trade at about 23 times earnings.
5. The climb has been strong and steady.
Y2K: Nasdaq rallied 95% from the October 1999 low to the March 2000 high.
Today: The index’s rise has been more gradual, only 21% from October 2014 to March 2015. (Source: BAML)
Top Ten Nasdaq Stocks by Market Cap, Then & Now