 "5 reasons why we needn't worry about Nasdaq@5000 levels")
It has taken 15 years for Nasdaq to reach the 5,000 levels last seen during the 2000 dotcom bubble days. In the year 2000, Nasdaq closed above the 5,000 levels for only two days before starting its memorable journey downwards losing 78% of its value over the span of nearly 30 months.
Are we back in bubble territory again, now that Nasdaq has crossed 5,000? Here are five reasons why this time may be different.
1. Nasdaq in 2000 largely comprised of stocks in information technology space. Today the index has companies from healthcare, consumer, financials and, of course, global technology giants. Diversification has de-risked the index. The index comprises of only half the number of companies now at 2,500 as compared to 4,700 then. On average, the companies now are twice the size they were in 2000 and have been in existence for 25 years now.
2. Nasdaq is actually a laggard. It is the last major index to touch its 2000 peaks. Both Dow Jones and the S&P500 are trading way above their 2000 peak levels.
3. The tech companies that are leading the charge have something that most of the companies in 2000 did not – real profits and cash in their books. Apple, the largest company with a market capitalization of $752 billion, is sitting on $175 billion in cash. In the previous quarter the company posted a record profit of $18 billion. Companies like Microsoft, Google, Oracle, Facebook and Intel have more cash but few ideas on how to utilise them.
4. Valuations of Nasdaq companies were 189.75 times at the peak in 2000 while they are now trading at 21 times. Even the stocks that were trading at lofty valuations in 2000 are at reasonable valuations now. Microsoft is trading at a price to earnings of 18 times now as compared to 73 then, it has yet to cross its 2000 peak. Intel is 15 now against 35 then; Apple is at 15 now against 37 then. Yahoo a darling of traders in 2000 exchanged hands at a valuation of 787 then and is now languishing at a valuation of 6.
5. Mobile revolution has created a number of new giants that were non-existent or were marginal players in 2000. Apple, Google and Facebook have emerged as some of the biggest technology companies in the world.
However, there are some traces of bubbles, especially in the social media and high tech space. Companies like Twitter is traded at 125 times earnings, same is the case with Netflix. Electric car maker Tesla is valued at 200 times. Similarly private equity deals are happening at astronomical valuations. Deals in SnapChat, Pinterest, Uber and Shazam have been struck at eye-popping valuations. Closer home we have the e-commerce companies that reflect such high valuations without any respectable earnings to back their valuations.