Why This NASDAQ Isn’t Deja Vu All Over Again
A lot has changed since March, 2000. My kids are adults. Thankfully, my waist line is actually less than it was in those days. HMC Partners is no longer a fledgling company transitioning from transactional sales to a “fee-based” advisory firm. NASDAQ is also a much different place than it was then. As the Nasdaq Composite Index is within 2% of returning to the monumental 5,000 it accomplished in 2000, the environment in which this index finds itself is much different than it was in the new Millennium. Let’s take a walk down the memory lane that was 2000.
The list of busts is long but some of the more famous dot.com debacles were Pets.com which went public in February, 2000 and was gone in November. There was eToys.com that hit a high in October, 1999 and was a company worthless just 16 months later. Garden.com, a gardening products retailer, had just 14 months of life trading above $20 per share in September, 1999 and like Pets.com, was pronounced dead in November, 2000 (1). Former Fed Chair Allan Greenspan foreshadowing in 1987 about the “irrational exuberance” in markets came home to roost.
It is also important to give some context to how much the tech market and the tech heavy Nasdaq have changed in 15 years. AOL was the most valuable internet company in 2000; Apple was nearly nonexistent in the minds of the tech sector; Dell was the hardware manufacturer of choice; at the height of the insanity, the PE ratio was over 100 in the index which is currently 25; cell phones weren’t smart; media wasn’t social, and Google and Facebook didn’t exist (2).
The make-up of the index has also changed. The current index has half the number of companies it did back then (4,715 in 1999 vs. 2,472 at the end of 2013). These fewer components now have twice the market cap on average as companies did in 1999 ($2.5B vs. $1.2B). Information Technology has declined from 57% of the index to the 38% it is now. The PE ratio of Microsoft at the end of 1999 was 73 and is 18 today.
Why won’t the bubble of 2000 occur again? The implosion of 2000 proved that earnings do matter. Stupid, made-up metrics like “eyeballs” (website hits) didn’t translate into real profits (3). Today’s Nasdaq is no longer made up undisciplined, immature companies with management who took an idea to market and cashed in before their business models where discovered to be as unattainable as their earnings.
The behemoths of the today’s Nasdaq are sitting on piles of cash. Besides Apple with its jaw-dropping $178B in cash, Microsoft, Tech30, Google, Cisco and Oracle also have more cash than they can spend (2). This abundance of cash creates its own set of issues like a lack of Capex spending. However, it’s much more comforting to be obtaining 5,000 while companies are cash rich with the earnings they’ve obtained versus capital received from the art of going public.
We are a long way from a tech bubble that popped a whole lot of people’s 401ks in 2000-2001. Investors are smarter today. They certainly don’t overweight in the tech-sensitive index as they did in 2000, and they certainly are more wary of “easy money” and “if it’s too good to be true” adages. We have a rally that should not only continue on the Nasdaq, but on S&P 500 too.