This is not the Nasdaq you once knew.
Fifteen years ago, at the height of the dot-com bubble, the tech industry barometer was the most spectacularly crazy part of an irrationally exuberant stock market.
These days, as the Nasdaq Composite Index once again flirts with record highs, it represents one of the more well grounded areas of a U.S. stock market that has spent the past few years busily exploring new frontiers in exuberance.
The Nasdaq index’s new sobriety reflects both the painful lessons of experience and the transformation of the technology sector from rebel outsider to establishment insider.
Back on March 10, 2000, when the index hit its record closing high of 5,048.62, the Internet was a revolution in progress – one that appeared likely to disrupt many traditional businesses. But what was even more beguiling from the viewpoint of millions of small investors was the amazing power of unproven Internet stocks to create overnight millionaires.
The Nasdaq benchmark tracked the price of the stocks that traded on the National Association of Securities Dealers Automated Quotation system (hence its name). Most of those stocks were in the tech sector, and the Nasdaq Composite had soared throughout the late 1990s as speculators concluded no price was too high to pay for shares of such seemingly surefire successes as Pets.com, an online retailer of pet supplies, or Webvan, an Internet-based grocery store.
All of that came to an end between mid-2000 and 2002 as a myriad of dotcom companies, including Pets.com and Webvan, crashed. Many of the other erstwhile Nasdaq revolutionaries – think software developer Oracle Corp. or network equipment maker Cisco Systems Inc. – survived and even prospered, but still fell short of the stratospheric expectations of investors.
The index collapsed to a low of 1,114.11 in October 2002 and spent the next decade languishing below 3,000, an experience that taught investors a stinging lesson in the price of irrational exuberance.
Other U.S. stock market indexes like the S&P 500 and the Dow Jones Industrial Average have set dozens of new highs over the past few years, thanks in large part to the low interest rates and other stimulus delivered by central bankers in the wake of the financial crisis. But the Nasdaq index, which poked its nose over 5,000 on Monday for the first time in 15 years, is still short of its former glory.
Chastened by experience, the expectations for the index now appear eminently realistic. While Nasdaq stocks changed hands for more than 70 times earnings back in early 2000, they now trade for a mere 22 times profits.
The Nasdaq’s rise in recent years has been powered by the stunning ascent of Apple Inc., the largest single component of the index. Google Inc. and Microsoft Corp., the next two biggest stocks in the index, have also boosted the benchmark. Notably all three of those tech giants trade for under 19 times earnings – distinctly unfrothy territory.
The stalwarts of the index – Apple, Cisco, Google and Microsoft – possess more than $360-billion (U.S.) in cash reserves, according to BlackRock, the money manager. It argues that while most U.S. stocks are fully valued, the tech sector still has room to grow – in part, because its mountain of cash gives it the capacity to deal with the higher interest rates that are expected later this year.
Meanwhile, the Nasdaq index has grown past its obsession with Internet stocks. Biotech now makes up 13 per cent of the benchmark and industrial companies account for another 32 per cent, according to Thomson Reuters Datastream.
All of that argues for the notion that the Nasdaq Composite’s slow climb back to respectability may herald more gains ahead. The index that once defined irrational exuberance now seems realistically optimistic.