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 Valuations, as measured by what investors are willing to pay for the
last 12 months of earnings, are an eighth of what they were at the
peak of the dot com bubble, when the Nasdaq hit an intraday record
of 5,132 before falling more than 63 percent in 12 months.
Dividend investors, too, now routinely hold large positions in
technology companies such as Microsoft, Cisco, and Oracle, a
decision unthinkable in the growth-focused days of 2000 but now
common thanks to mountains of corporate cash and changes in tax
policy that have been favorable to dividends.
Should the Nasdaq set a new record soon, as many expect - the index
remains about 4 percent below its highest point after gaining nearly
15 percent over the last 12 months - its catalyst won't be
irrational exuberance, fund managers and analysts say.
Instead, three key factors underpin the Nasdaq's 125 percent rise
over the last five years: the Federal Reserve's ongoing policy of
near-zero interest rates that has made equities more attractive than
bonds; the maturation of technology companies; and the rise of Apple
Inc, a company that didn't appear among the largest 20 companies by
market value in the index 15 years ago and now represents more than
10 percent of its weight.
BUBBLE QUESTIONS
The Fed's policy of keeping short-term interest rates near zero is
credited with pushing up the prices of stocks and real estate
broadly over the last five years. Yet fund managers say that they
see few signs of a bubble in technology stocks, at least for now.
"Because the Federal Reserve has waited so long to get rates back to
normal, it's almost set up to fuel a bubble," said David Kelly,
chief global strategist at J.P. Morgan Funds. "But my sense is that
there's still a nervousness about the U.S. equity market and it's
been keeping a lid on valuations getting out of hand."
The pace of new initial public offerings has slowed considerably
from the 630 tech IPOs that came to market between 1999 and 2000,
leading to less speculation overall. By comparison, 299 companies
overall went public between the start of 2014 and the year to date,
according to Renaissance Capital. Technology companies make up 43
percent of the Nasdaq.
Back then, companies routinely went public with little more than a
concept. Now, companies such as Uber, the popular ride-hailing
service, have seen their valuations top $40 billion in the private
markets, in part because mutual fund firms are more willing to take
stakes in early-stage companies.
Facebook Inc, for instance, reached a valuation of $50 billion while
still private, thanks in part to investments by fund companies such
as T. Rowe Price, according to date from VentureSource. On an
inflation-adjusted basis, that was larger than the market value of
all but 14 companies in the Nasdaq at its record on March 10, 2000,
according to data from Nasdaq OMX Group.
"Companies are staying private longer to develop their businesses so
that when they go public they have a better chance of success out of
the gate," said Michael Cuggino, portfolio manager of the Permanent
Portfolio Aggressive Growth Fund.
Even if there isn't a bubble now, investors face other concerns.
Chief among them: some of the largest companies in the Nasdaq are
showing their age, a worry that they didn't have 15 years ago.
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"What you're seeing with companies like Cisco and Qualcomm is that
they have evolved to a point in their life cycle where it's very
tough to show a lot of growth. That's the huge challenge now," said
Skip Aylesworth, the portfolio manager of the Hennessy Technology
Fund.
Cisco said in August it would cut 6,000 jobs, at least the third
workforce reduction in about as many years for a company once
synonymous with the Internet boom, but which has lately struggled to
sustain growth. Semiconductor maker Qualcomm has branched into
markets such as medical equipment and solar panels in recent years
in order to increase its growth rate.
APPLE INFLUENCE
Investors' long memories of getting burned in the last crash has
weighed on the Nasdaq, which has yet to surpass its previous highs
even as the broader Standard & Poor's 500 index and Dow Jones
Industrial Average have repeatedly topped new peaks over the last
year, fund managers say.
The rally in the shares of Apple - which has jumped nearly 68
percent over the last 12 months, including a 16.7 percent gain for
the year to date - is likely to push the Nasdaq to new records, fund
managers say.
"You have the largest company in the world continuing to grow at
above-market rates, which is incredible," said Aylesworth, the
Hennessy manager.
Apple represented slightly over 10 percent of the Nasdaq's market
value as of Wednesday's close. At its record high in 2000, Apple
made up less than 0.2 percent of the index. At the time, company
co-founder Steve Jobs was just three years into his second go-round
as its chief executive, and the company was still a year away from
introducing the iPod digital music player.
Despite its growth rates, Apple still trades at a trailing price to
earnings ratio of 17.3, in line with the broad S&P 500 index, and
pays a dividend yield of 1.4 percent.
Apple's outsized presence in the Nasdaq - along with that of Google
Inc, a company that was still private 15 years ago and now
constitutes about 4 percent of the index - is one sign that the
technology sector has matured, said Phil Orlando, chief equity
market strategist at Federated Investors.
"It's taken fifteen years for the Nasdaq to grow into something
rational," he said.
(Reporting by David Randall; editing by Linda Stern and John
Pickering)
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