It has been 18 years since the ‘dot-com’ bubble happened in 2000, and many people are wondering when Ctrl + Alt + Delete button might get clicked again in their portfolio. As the NASDAQ gently clipped the 8,000 mark this past week, there have been many articles discussing that equities are ending their run especially in the arena of technology. However, today’s technology run is far different than that of 20 years ago when the NASDAQ traded at triple-digit P/E ratios and anything with a dot-com after it and a pulse would have significant valuation in the marketplace.
Here were the top 10 holdings back in 2000 in the NASDAQ
Today, the top 10 holdings in NASDAQ include the following:
Apple, Amazon, Microsoft, Google, Facebook, Cisco, Intel, Comcast, PepsiCo, and Netflix.
So, why is this tech bubble so much different than the tech bubble from almost 20 years ago?
Dividends – Companies have lots of choices on what to do with their capital. They can buy back stock, spend more money on research and development, let the money sit in cash, make acquisitions, or pay increased dividends to their shareholders. With more money coming back into corporations with the recent corporate tax cuts and the repatriation of overseas money coming back into the United States, many of these technology companies are sitting on a lot of cash. In the year 2000, only Intel was paying a dividend to shareholders with a paltry .1% dividend yield.
In today’s markets, here are the following dividend payouts from the top 10 NASDAQ companies. (source Yahoo)
- Apple: 1.31% Yield
- Microsoft: 1.54% Yield
- Cisco: 2.79% Yield
- Intel: 2.54% Yield
- Comcast: 2.12% Yield
- Pepsi: 3.27%
This means that there are now 6 of the top 10 NASDAQ companies that are paying dividends and the yields are dramatically higher than the small dividend yield Intel was paying in the year 2000.
Price To Earnings Ratio – When you decide to buy a stock publicly, one of the key metrics to review are the price to earnings ratio. In essence, the price-earnings ratio indicates the dollar amount an investor can expect to invest in a company in order to receive one dollar of that company’s earnings. This is why the P/E is sometimes referred to as the price multiple because it shows how much investors are willing to pay per dollar of earnings. If a company were currently trading at a multiple (P/E) of 20, the interpretation is that an investor is willing to pay $20 for $1 of current earnings. In the year 2000, the P/E ratio of the top 10 NASDAQ stock was 161. Again, this means that you would be willing to pay $161 for $1 earnings. As the great Kevin O’Leary (a.k.a. Mr. Wonderful) would say, “How am I going to get my money back?”
Today, the overall P/E of the NASDAQ is slightly above twenty and even with the raging fire that some of these top 10 stocks have been on the past couple of years, the top 10 stocks only carry a P/E of 55. That is one-third of where the insane P/E’s were almost twenty years ago.
Cash On Hand – Today’s technology companies are so much different than even the shadow of the companies they were in 2000. As of the first quarter in 2016, Apple led the way with almost $216 billion in total cash on hand as the top company in the entire spectrum of stocks. Microsoft had $103 billion, Google $73 billion, Cisco $61 billion, and Intel with $31 billion. Having cash on hand is so crucial to the success of companies when things are not going well. It gives them that cushion to buy other companies on sale, stabilize the company when business units are not doing well, and continue to make investments in new technologies. As a side note to illustrate just how much different the world is today, Apple said in 2001, “Our cash position remains very strong at over $4 billion, and we are planning a return to sustained profitability beginning this quarter,” said Fred Anderson, Apple’s CFO.” This means that in 2016 Apple had 55 times as much cash on hand than they did in 2001.
Does all of this mean that we won’t see some sort of correction in the stock market….no it does not. Does it mean we won’t see a selloff of tech stocks in the next week or month or year …..no it does not. But, what it does mean is that the fundamentals that caused a meltdown twenty years ago in technology stocks are far different than the fundamentals of where are in today’s technology market. If you have the right time frame, risk tolerance, and long-term objectives, consider that price in of itself is not the only thing you want to watch. Companies still have to pay money, build a solid disciplined business, and ultimately create shareholder value. Where do you think NASDAQ will be 10 ten years from now?
If you want to set up a time to discuss specific investments in these areas, please go to oXYGen Financial to set up an appointment.