4. Strong earnings growth helps keep NASDAQ valuations attractive.
Y2K: Earnings were nonexistent for many Nasdaq companies, and according to index data its price/earnings ratio at times exceeded 200 through multiple expansion.
Today: Nasdaq stocks currently trade at about 23 times earnings.
Market Realist – The NASDAQ’s 5,000 level shouldn’t be as scary as last time for the simple reason that stocks then were propped up by irrational exuberance about the tech sector (XLK)(IYW)—not on the basis of robust earnings. Today, stocks have modest price-to-earnings multiples, which make them look attractive. The promise of technology stocks has translated into solid deliverables with strong earnings growth.
In 2000, companies like Microsoft (MSFT) and Cisco (CSCO) were heavily overvalued. The NASDAQ index as a whole had a price-to-earnings multiple of 175x (trailing), which goes to show the extreme speculative build-up during the time. Stocks today look almost subdued in comparison.
The graph above shows the price-to-earnings multiples of the top ten NASDAQ stocks in 2000. Yahoo (YHOO), Qualcomm (QCOM), Cisco (CSCO), and Oracle (ORCL) all had price-to-earnings multiples exceeding 100x.
Market Realist – The graph above shows the price-to-earnings multiples of the top ten NASDAQ stocks as of the beginning of March 2015. Mature tech stocks like Microsoft and Intel (INTC) look attractive based on their price-to-earnings multiples. Tech giants Apple (AAPL) and Google (GOOGL) too look relatively attractive. Amazon (AMZN) is probably the only stock that looks extremely overvalued, with a multiple of more than 600x. According to Factset, the top 10 NASDAQ companies should register revenue growth of 14% in 2015.
The US economy is showing some cyclical momentum, which should help mature tech stocks going ahead as businesses start to increase capital expenditure. US markets have been buoyed by the Federal Reserve’s quantitative easing and near-zero interest rates along with favorable growth in corporate earnings. The S&P 500 (IVV) and the Dow Jones Industrial Average (DIA) are also at record-high levels, so a NASDAQ 15-year high is only consistent with the overall economy and not an aberration.
Market Realist – According to research by Morgan Stanley, 90% of technology companies today have positive operating profit margins. This figure had dipped to near 50% during the dot com bubble. Positive earnings support the the index’s current valuations.
Read on to the next part of this series to see why mature tech stocks are likely to be a good value play.