15 years ago, the NASDAQ Composite, a basket of largely young Technology stocks, was approaching a level never seen before; 5,000. It finally reached that major milestone in March of 2000, something that was widely celebrated as the internet changed the world. Enthusiasm was inflated, and so was the NASDAQ Composite. The Dot.com Bubble burst and the rest is history. It was an important lesson for all. There is no question, the broad scale buildout of the world wide web was a game-changer. It has changed the way we communicate, conduct business and consume. The critical lesson for investors back then was simple; price still matters.
The Bubble that was formed in the 1990’s consisted of multiple start-up companies that were not only unprofitable, but never had a plan for profits. Their stocks soared to sky-high multiples that stretched valuations to new heights, and defied the comfort and logic of seasoned Wall Street analysts. Fast forward 15 years later, this infamous stock index is back near that 5000 level. But it is far different from its past.
Microsoft, Intel and Cisco were amongst the largest positions in the NASDAQ in 2000. They still are today as proven survivors. Companies like WebVan, Lycos, and Pets.com are gone. Back then, Apple was merely a niche player in computing. Google was a 2-year old start-up, and had not yet had its IPO. Facebook wasn’t even a dream let alone a company. These 3 companies are now Top 5 holdings in today’s NASDAQ. Things have changed significantly.
The NASDAQ is still heavy in Tech, but Consumer and Health Care companies account for nearly 40% of the index today. Microsoft was the largest component of the NASDAQ in 2000, and had a Price/Earnings ratio of a whopping 73. Today, Apple, the largest component has a P/E ratio of just 14. Today’s NASDAQ is stronger and much healthier than 15 years ago. It’s heavily weighted to legitimate innovators that continue to execute and grow. With this major milestone in reach, many are calling it another Bubble. We don’t see it that way at all. A case can certainly be made for bubble-like valuations in private equity and venture capital. We don’t see it in the publicly traded stock market at large. That’s not to say that other bubbles won’t be formed again, such as housing in mid 2000’s. We see NASDAQ 5000 being reached in short order, and do not see it marking a multi-year top at all. It might take a much deserved breather. In fact, breaking thru this level could very well launch a new trading range at higher levels, and once and for close the door on the Dot.com Bubble.
Have a nice weekend. We’ll be back, dark and early on Monday.
PS, for those that are wondering, NASDAQ stands for National Association of Securities Dealers Automated Quotations, and used to be referred to as the “over-the counter market” .